A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.
Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.
What Is a Money Purchase Pension Plan?
Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.
Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.
Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.
Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but it may allow them to do so. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.
What Are the Money Purchase Pension Plan Contribution Limits?
Each money purchase plan determines its own contribution limits are, though they can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.
Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2022, the maximum contribution allowed is the lesser of:
• 25% of the employee’s compensation, OR
The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you’re able to retire.
Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty of 10.
Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.
The Pros and Cons of Money Purchase Pension Plans
Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.
Pros of Money Purchase Plans
Here are some of the advantages for employees and employers who have a money purchase plan.
• Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.
• Loan access. Employees may be able to take loans against their account balances if the plan permits it.
• Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.
• Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.
Disadvantages of Money Purchase Pension Plan
Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.
• Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.
• Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)) a company could run into issues in years when cash flow is lower.
• Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), they could still defer part of their salary for retirement.
Money Purchase Pension Plan vs 401(k)
The main differences between a pension vs. 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.
With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.
The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $61,000 for 2022. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2022, the total employee contribution limit is $20,500 with an extra catch-up contribution of $6,500.
Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.
Recommended: IRA vs 401(k)–What’s the Difference?
Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.
|MPPP Plan||401(k) Plan|
|Funded by||Employer contributions, with employee contributions optional||Employee salary deferrals, with employer matching contributions optional||Tax status||Contributions are tax-deductible for employers, growth is tax-deferred for employees||Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees|
|Contribution limits (2022)||Lesser of 25% of employee’s pay or $61,000||$61,000, with catch-up contributions of $6,500 for employees 50 or older|
|Catch-up contributions allowed||No||Yes, for employers 50 and older|
|Loans permitted||Yes, if the plan allows||Yes, if the plan allows|
|Hardship withdrawals||No||Yes, if the plan allows|
|Vesting||Determined by the employer||Determined by the employer|
Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.
Whether you save for retirement in a money purchase pension plan, a 401(k) or another type of account the most important thing is to get started. If you don’t have access to a money purchase pension plan or similar plan at work there are other options you can pursue, such as opening an IRA online through the SoFi Invest brokerage platform. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding interest.
Here are answers to some additional questions you may have about money pension purchase plans.
What is a pension money purchase scheme?
A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.
Can I cash in my money purchase pension?
You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, you can start taking Early withdrawals from a money purchase pension plan are typically not permitted and if you do take money early, taxes and penalties may apply.
Is final salary pension for life?
A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans do pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.
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