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- How the required contribution works
- Contribution limits still apply
- Vesting controls ownership of employer contributions
- Distributions are more restricted than the account label suggests
- ERISA governs administration and participant information
- What happens if required contributions are missed
- PBGC insurance does not cover the account
- How to read a money purchase plan accurately
- Sources
Key Facts
- Federal level: A money purchase plan is a defined contribution pension plan that requires contributions under the formula written into the plan.
- Federal level: Each participant has an individual account, and the eventual benefit reflects contributions plus investment gains or losses rather than a promised monthly pension amount.
- Federal level: The required contribution distinguishes a money purchase pension plan from a profit-sharing plan, in which the employer generally retains annual discretion over whether and how much to contribute.
- Federal level: Money purchase plans generally file Form 5500 annually and remain subject to federal qualification, ERISA, fiduciary, disclosure, vesting, and distribution rules.
- Federal level: PBGC does not insure money purchase plans because they are defined contribution plans.
A money purchase plan turns a written contribution formula into a recurring retirement-plan obligation. The employer does not promise a particular retirement income; instead, the plan credits contributions to separate participant accounts, which rise or fall with investment results.
The word “pension” can therefore be misleading. Federal tax law treats a money purchase arrangement as a pension plan, but its account-based design differs from a traditional defined benefit pension that promises a formula-based benefit.
How the required contribution works
The plan document states the contribution formula. If the formula requires 5% of each eligible employee’s compensation, the employer generally owes that contribution for each covered participant even when the business would prefer to contribute less for the year.
This fixed commitment is the plan’s defining feature. A profit-sharing plan generally permits the employer to decide the contribution from year to year, while a money purchase plan makes the stated formula mandatory.
The formula determines what enters the account, not what the account will ultimately pay. Investment performance, fees, distributions, and the length of participation affect the final balance.
Contribution limits still apply
Federal law limits the annual additions allocated to a participant’s defined contribution accounts. Internal Revenue Code Section 415 sets the ceiling as the lesser of a dollar limit adjusted over time or 100% of the participant’s compensation, subject to the statute’s definitions and aggregation rules.
The IRS’s money purchase plan overview still displays older annual dollar examples, so a current limit should be checked for the relevant plan year rather than copied from an undated summary. The plan formula, tax-deduction rules, compensation limits, and Section 415 ceiling answer different questions and should not be treated as one interchangeable percentage.
Vesting controls ownership of employer contributions
Vesting means ownership of the amount in the account. A qualified defined contribution plan may use a vesting schedule allowed by federal law and stated in its governing documents, while an employee’s own contributions are always fully vested.
Leaving employment does not necessarily erase the account. The vested portion remains the participant’s benefit, while a nonvested portion of employer contributions may be forfeited under the plan’s terms and federal rules.
Distributions are more restricted than the account label suggests
A separate account is not the same as an ordinary savings account. Money purchase plans are pension plans for federal distribution purposes, and the IRS states that in-service withdrawals generally are not permitted.
Federal law allows certain pension plans to provide in-service distributions after a participant reaches age 59½, but the plan document still controls whether the option is offered. A plan may also permit participant loans if its terms and federal loan rules allow them.
When a benefit becomes distributable, the available forms and rollover choices depend on the plan document and federal law. Tax treatment is a separate issue; the broader rules are explained in TheFirstFile’s guide to whether pension payments are taxable.
ERISA governs administration and participant information
Most private-sector money purchase plans operate under the Employee Retirement Income Security Act, commonly called ERISA. People who exercise discretionary authority over plan management or assets are fiduciaries to the extent of that authority and must act for participants and beneficiaries under federal standards.
Participants ordinarily receive a summary plan description explaining eligibility, contribution levels, vesting, benefit claims, and other core terms. Individual benefit statements provide account and vested-benefit information, while Form 5500 supplies annual reporting to federal agencies.
The plan document and current disclosures matter more than the generic plan label. Two money purchase plans can use different eligibility rules, vesting schedules, investment arrangements, loan provisions, and distribution options while remaining within the same federal category.
What happens if required contributions are missed
The required formula is not merely a target. The IRS warns that an excise tax can apply when a money purchase plan’s minimum funding requirement is not satisfied.
A funding failure can also create qualification and fiduciary issues that depend on the plan, the amount, the timing, and the correction method. Those consequences belong to the plan-administration system rather than changing a participant account into a guaranteed PBGC benefit.
PBGC insurance does not cover the account
The Pension Benefit Guaranty Corporation insures certain defined benefit plans, not defined contribution plans. Because a money purchase plan provides an individual account rather than a promised defined benefit, PBGC does not insure its investment value or replace losses in that account.
That boundary does not remove ERISA protections. Fiduciary duties, required disclosures, claims procedures, vesting rules, and federal enforcement can still apply even though PBGC insurance does not.
How to read a money purchase plan accurately
The most useful documents answer different questions. The plan document establishes the legal terms; the summary plan description translates major terms for participants; benefit statements show account and vesting information; and Form 5500 reports specified plan information to federal agencies.
A money purchase plan is ultimately a federally regulated individual-account pension arrangement with a mandatory contribution formula. Understanding it requires keeping four ideas separate: what the employer must contribute, what the participant owns, how the account is invested, and when federal law and the plan permit payment.
Sources
- IRS overview of money purchase plans
- 26 U.S.C. § 401 — Qualified pension, profit-sharing, and stock bonus plans
- 26 U.S.C. § 415 — Limits on benefits and contributions
- 26 U.S.C. § 411 — Minimum vesting standards
- IRS retirement topic on vesting
- IRS issue snapshot on pension-plan distribution restrictions
- PBGC glossary of defined contribution and money purchase plans
