Money Purchase Plans

Money Purchase Plans come under the catagory of Defined Contribution Plans. Unlike Profit-Sharing Plans, a Money Purchase Plan's contribution is a fixed percentage of each Participant's compensation.

An example of a 10% of compensation contribution would be:

                            Required        % of 
               Pay        Contribution      Total
Dick         150,000         15,000         62.5%
Jane          60,000          6,000         25.0%
Sally         30,000          3,000         12.5%
             -------         ------              
             240,000         24,000              

This type of plan is often "paired" with a Profit-Sharing Plan to allow a deduction of up to 25% of compensation (15% being the Profit-Sharing maximum). This allows the employer to select a contribution range (and deduction) of from 10% to 25% of participant's compensation.

Integration allows employers to skew contributions in favor of the highly paid to a limited extent. In the above example, assume Dick is the owner of the company. If the Taxable Wage Base (the maximum amount on which FICA contributions are required) was $60,000, a contribution formula of 5.7% of all pay, plus 5.7% of pay over the taxable wage base would be acceptable, and would break down as follows:

                            Required         % of 
               Pay        Contribution       Total
Dick         150,000         13,680          72.7%
Jane          60,000          3,420          18.2%
Sally         30,000          1,710           9.1%
             -------         ------               
             240,000         18,810               

Forfeitures are dollars left behind by participants who leave employment before becoming fully vested. If you had an account worth $10,000 and were 40% vested (40% is yours no matter what), if you left your employer, you'd leave $6,000 behind. A plan must specify what happens with this $6,000. Until recently, this forfeited money would have to reduce the employer's contribution. (In the second example, the employer would contribute and deduct $12,810) and allocate the remaining $6,000 to provide the balance of the required contribution.) It is now permissible to add the forfeiture to the contribution. It would be allocated on a salary ratio.

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