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Money Purchase Pension Plans
A money purchase plan is a type of defined-contribution plan
that is similar to a profit-sharing plan, except that the contribution
amounts are fixed rather than variable. Thus, employers are required to make
annual contributions to each employee’s account regardless of the company’s
profitability for the year. These plans can be used in conjunction with
profit-sharing plans to achieve the maximum contribution levels allowed each
year.
Employers that set up money purchase plans must declare a set
contribution level each year in the plan document, based on employees’
salaries. Companies can contribute up to 25% of the total annual
compensation of all plan participants, up to 100% of each participant’s
salary or $45,000 (in 2007), whichever is less.
Employer contributions are tax deferred as long as the
amounts are within annual limits. As with other defined-contribution plans,
employee funds accumulate tax deferred until withdrawn. It’s important to
note that employees are not given the option of contributing additional
money to their own accounts. However, they are often allowed to choose which
investments will be included in their accounts.
It is common for employers to set up vesting schedules that
dictate when an employee can claim the funds from his or her plan. When
employees are fully vested, they are able to begin taking withdrawals at the
age of 59½ without incurring a tax penalty. Employees may also borrow from
their plans before they reach 59½ if a circumstance occurs that can be
identified as a “qualifying event,” as defined in the plan document.
Withdrawals are taxed as ordinary income and must begin after
the account holder reaches the age of 70½, either as a lump sum or in
minimum annual installments based on life expectancy.
If you are a business owner and desire to attract employees
from larger corporations that offer a wide range of retirement plans, then a
money purchase pension plan may be an option for you. It allows you to
contribute high amounts on your employees’ behalf while providing you with
the added benefit of tax deductions.
© 2007 Emerald Publications
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