Money Purchase Pension Plan

[Note: Effective in 2002, under the changes in the law under EGTRRA, money purchase plans will effectively become obsolete.]

If your business is consistently profitable and you are an employer who wants to reward key employees with a generous retirement benefit; or if you are self employed individuals who would like to tax-shelter as much income as possible, then you should seriously consider sponsoring a Money Purchase Pension Plan.

Unlike a Profit Sharing Plan where employer contributions are optional, under a money Purchase Pension Plan, employer contributions are mandatory and the employer contributes a fixed amount or a fixed percentage of compensation on an annual basis. Changing the contribution requires a plan amendment which the IRS will only allow if the change is infrequent. The "up side" is that such plans, funded solely by the employer, permit higher total contributions to as much as 25% of compensation.

Similar to profit sharing plans, money purchase pension plans may allow the exclusion of some employees by using eligibility criteria and give the employer a greater degree of control in determining when employees are vested.

MONEY PURCHASE PENSION
PLAN OVERVIEW
PRIMARY BENEFITS
Higher overall plan contribution limits than profit sharing plan up to 25%
Flexible vesting schedule
Alternative contribution allocation methods permitted
May apply eligibility criteria
May be paired with other tax favored retirement plans
Loans available

NOTE ALSO
Employer contributions are fixed and mandatory
Funded solely by employer
Involves top-heavy testing; moderate administration and paperwork
Government reporting required
Distribution restrictions

Money Purchase Pension Plan
Detailed Summary
Plan Size
Businesses of all sizes
Individuals with self-employment income, earned on either a full or part-time basis

Plan Adoption And Contribution Deadlines

Must be established by the employer's fiscal year end
Employer contributions must be made by employer's tax-filing deadline, including extensions

Employee Eligibility Requirements

Flexible, however any employee 21 years old with 1,000 hours of service per year for two or more years must be eligible for the plan

Funding
Employer-funded only
Contributions are discretionary
May utilize various allocation methods

Maximum Annual Contributions

Maximum contribution allocated to an employee of 100% of participant's annual compensation or $40,000, whichever is less
Maximum overall plan contribution limited to 25% of company eligible payroll
Maximum overall contribution for sole proprietor or partnership plan sponsors limited to 13.04% of net profit or partnership income

Vesting

Dependent on vesting schedule selected by the employer
With a one year of service requirement vesting may be graded for a period up to seven years (If two years of service are required for eligibility, contributions must be 100% vested immediately)

Withdrawals And Loans
Withdrawals are taxed as ordinary income and are subject to a 10% tax penalty unless taken after the attainment of age 59.5 or because of death or disability
Availability of hardship withdrawals
Availability of loans

Administration And Reporting

Employees must be given notice when the plan is established and new employees must be notified when eligible
Top-heavy and non-discrimination testing required
Annual limits and loan tracking required
Required filing of IRS Form 5500
Requires a Summary Plan Description and a Summary Annual Report

NOTE: The Economic Growth and Tax Relief Reconciliation Act of 2001 [EGTRRA] has brought about sweeping changes in the rules governing retirement plans. Please consider these changes as you address issues surrounding your retirement plan decisions. For more detailed information and answers to specific questions about this new Federal legislation please visit the Federal Legislation Update section of this website or contact us directly at 847-550-0144 or e-mail us at info@gfsginc.com.

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