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%
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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%
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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.
Questions or comments can be directed to us at (415) 785-1173 or E-Mailed to chip@peregrinepensions.com