Money Purchase Pension Plans – Offering Fixed Employer Contributions

Profit sharing retirement plans are great ways of accumulating funds for the employees of a business. However, these plans encourage the employer to contribute variable amount of contributions every year. An improvement is available in the form of money purchase pension plans, where a fixed contribution is offered by the employer to the employees of the company. Thus the employees are benefited with a fixed amount of contribution every year, irrespective of the value of profit earned by the company.

There are some companies, which combine money purchase plan with profit sharing plan to increase the value of overall contributions made to an employee’s account.

How Contributions Are Fixed

The contributions towards employees are fixed by the employer mainly on the basis of salaries received by different employees. It is beneficial for both, the employer and the employee, to prepare documents for this plan and fix the contribution in these documents. The latest trend allows an employer to contribute $45,000 or 25% of the total compensation paid to the eligible employees, whichever constitutes less value towards money purchase plans.

Tax Deferred Nature

Like all other plans, money purchase pension plan also possesses tax deferred nature, provided that contributions don’t exceed annual fixed limits. The funds are tax deferred as long as they lie secure in the account and are not withdrawn.

The employees are not allowed to make personal contributions towards these plans, however, they are free to choose the investment vehicle for their funds in case of money purchase pension plans.

Rules for Claiming Funds

The rules for claiming funds are no different from any other employer-contributed retirement plan prevailing these days. The minimum age for obtaining funds from your accounts, without worrying about tax penalty, is that of 59 and half. However, in emergency situations referred to as qualified events in the documents prepared for the plan, these penalties are not applied to the withdrawals of funds.

Apart from this, the rule of normal tax deductions is followed in this retirement plan as well. The age of obtaining minimum distributions is 70 and half, as is the case with other retirement plans. You can either obtain all funds at one time or fix the installments on the basis of life expectancy.

Thus, being a business owner, you can extract advantages out of money purchase pension plan for yourself and more importantly, for your employees, so that they can contribute their best towards tour business.