Chapter 16
MONEY PURCHASE PENSION PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of money purchase pension plans
REVIEW:
This chapter begins with a quick overview of money purchase plans, and then
briefly discusses when an employer might use such a plan. Following coverage
of advantages and disadvantages, the chapter discusses money purchase plan
design features. Tax implications and a few alternatives are then discussed. This
chapter directs the reader back to Chapter 10 for information on how to install a
money purchase plan. The chapter closes with a reference for learning more,
and a brief question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features
Tax Implications
Alternatives
How To Install A Plan
Where Can I Find Out More About It?
Questions And Answers
Chapter Endnotes
FEATURED TOPICS:
Money purchase pension plan
1
Chapter 16
FIGURES:
Figure 16.1 Account Balance Relative to Annual Salary Increase
Figure 16.2 Account Balance Relative to Entry Age and Rate of Return
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
1. Defined contribution
a. Money purchase
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of money purchase pension plans
KEY WORDS:
money purchase pension plan, nondiscriminatory contribution formula
DISCUSSION:
1. Discuss advantages and disadvantages to using a money purchase
plan.
2. Discuss when an employer might want to establish a target benefit
plan or a profit sharing plan rather than a money purchase plan.
QUESTIONS:
1. Which one of the following is true about employer contributions into a money
purchase plan?
a. contributions cannot exceed 30% of an employee’s compensation
Chapter 16
b. in 2005, the maximum dollar amount of annual contributions to an
employee’s account cannot exceed $50,000
c. plan contributions go into a pooled account rather than into individual
employee accounts
d. plan benefits accumulate in individual employee accounts which will be
available at retirement or termination of employment
Chapter 16, p. 147
2. Which one of the following may be considered a disadvantage for employees
to money purchase pension plans?
a. employees bear investment risk under the plan
b. employers bear investment risk under the plan
c. plan distributions may be eligible for the 10-year special averaging
computation
d. good investment results increase plan benefits
Chapter 16, p. 149
3. Which one of the following correctly identifies the term used to identify a plan
benefit formula that can be integrated with Social Security?
a.
b.
c.
d.
offset formula
social insurance rider
permitted disparity
compensation analysis formula
Chapter 16, p. 150
4. Which of the following are true regarding money purchase plans?
(1) self-employed persons can adopt a money purchase plan
(2) plans in S corporations cannot cover shareholder-employees
(3) money purchase plans can allow after-tax employee contributions
(4) salary reductions allowing pre-tax contributions are not allowed for post1974 plans
a.
b.
c.
d.
(1) and (3) only
(1) (3) and (4) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 16, pp. 151-52
Chapter 16
ANSWERS:
1. d
2. a
3. c
4. b