Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
What Is It?
A qualified retirement plan where:
–
each employee has an individual account
–
employer contributes to employee account
–
plan benefits are result of employer contributions, interest
or other investment return and capital gains
–
employee account balance may be paid out as an annuity
equivalent in value to account balance
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
When is it Indicated?
1.
employer wants a qualified plan that is simple to
administer and explain to employees
2.
relatively young employees with time to accumulate $
3.
employees willing to accept investment risk
4.
some retirement income security desired
5.
employer wants to reward long-term employees
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Advantages
1. tax deferred savings
2. plan simple and inexpensive to design, administer,
explain to employees
3. plan formula typically allows up to 25% employee
compensation, with contribution not exceeding $49,000
(2009, indexed)
4. certain lump sum distributions may qualify for 10-year
averaging
5. participants benefit from good investment results
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Disadvantages
1. retirement benefits may be inadequate for older plan
entrants; disparity between short and long term
employees reduced somewhat by salary increases
2. annual addition to each employee account limited to
– lesser of $49,000 (2009, indexed) 0R 100% compensation
– $245,000 cap on compensation
3. employees bear investment risk
4. employer must make plan contributions each year or
face minimum funding penalties
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Design Features
• benefit formulas
– flat % of employee compensation – up to 15% (typical)
– service-related factors
•
favors older, higher compensated
•
may lead to prohibited discrimination in closely held or
professional corporations
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Design Features
• only first $245,000 of employee’s compensation can be
considered in the plan formula
• to avoid discrimination can
– comply with safe harbor rules under IRC Section 401(a)(4)
– satisfy a general nondiscrimination test
– restructure plan
– use cross-testing
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Design Features
• plan benefit formula can be ‘integrated’ with Social
Security
• vesting schedules permitted by IRC can be used
• benefits usually paid at termination of employment or
plan’s stated normal retirement age
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Design Features
• no ‘in-service’ distributions unless due to employee
death or disability, severance of employment or
termination of the plan
• money purchase plan funds
– generally invested in pooled account managed by employer or
fund manager designated by employer
– can be in trust fund or group or individual life insurance
contracts
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Tax Implications
As a qualified plan
– employer contributions tax deductible when made
– plan contributions tax deferred for employee
IRC Section 415 limits apply
– annual additions to each account lesser of 100% employee
compensation or $49,000 (indexed)
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Tax Implications
Annual additions include
– employer contributions to participant account
– forfeitures from other participant accounts
– employee contribution to the account
Plan distributions must follow rules for qualified plans
Lump sum distributions may be eligible for special 10 year
averaging
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Tax Implications
Plan must meet IRC Section 412 minimum funding rules;
including annual contributions
Certain employers eligible for $500 business tax credit for
“qualified start up costs”
Plan may permit employees to make voluntary
contributions to “deemed IRA” under plan
Plan subject to ERISA reporting and disclosure rules
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Alternatives
Target benefit plans
– employer contribution % can be based on age at plan entry
– may be more favorable for older employees
Profit sharing plans
– give employer more flexibility in contributions
– give employees less security
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Alternatives
Defined benefits plans
– give employees more security
– provide larger contributions for older employees
– more complex to design and administer
Nonqualified deferred compensation plan
– can provide for select executives
– employer tax deduction delayed until benefit payments made
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Alternatives
Individual savings plans
– IRAs allow tax deferral
– contribution limits may be too low for some employees
– tax deduction phased out for higher income individuals
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
True or False?
1. Each employee has an individual account in a money
purchase plan.
2. A money purchase plan will typically provide older
workers with sufficient retirement income.
3. The employer bears investment risk in a money
purchase plan.
4. Money purchase plan contributions are typically based
on a flat percentage of employee compensation at all
salary levels.
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
True or False?
5. Using service related factors in a money purchase plan
benefit formula will generally help the employer avoid
violating the nondiscrimination rules applied to qualified
plans.
6. Money purchase plans are generally invested in a
pooled account managed either by the employer
(though a trustee or insurance company) or fund
manager designated by the employer.
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
True or False?
7.
8.
An integrated plan provides a higher rate of employer
contribution level above the integration level than
below the integration level.
Forfeitures in a money purchase plan can only be
used to reduce future employer contributions.
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
True or False?
9.
Money purchase plans provide for participant plan
balance at retirement to be converted to an
equivalent annuity.
10. A money purchase plan is subject to ERISA reporting
and disclosure rules.
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Money Purchase Pension
Plan
Chapter 16
Employee Benefit & Retirement Planning
Discussion Question
What are the advantages and disadvantages of a selfemployed person or a shareholder-employee in an S
corporation utilizing a money purchase pension plan?
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