Money Purchase Plan

 

A money purchase pension plan operates like a profit sharing plan. The major difference is that, unlike profit sharing plans where employers are permitted to make discretionary contributions each year, the employer has a contribution formula which is stated in the plan document. Contributions must be made each year regardless of the employer's profits.

 

The maximum annual contribution is the lesser of 100% of salary or $58,000 (2021 - Indexed) per participant.

 

The employer is obligated to make contributions unless the plan is terminated or frozen. The maximum deductible contribution for the business is 25% of eligible employees payroll.

 

The contribution formula may be integrated with Social Security.

 

Money purchase plans have limited appeal after 2002 since profit sharing plans now have the same deductible limits - with greater flexibility. Money purchase plans are still applicable in cases requiring a fixed contribution. Example - a union negotiated plan.