Money Purchase Pension Plans are similar to profit sharing plans with one major exception:
- The contributions must be made every year regardless of earnings or profits
Unlike profit sharing plans where a discretionary contribution formula allows for flexible contributions, money purchase pension plan contributions generally are based on a fixed rate percentage of compensation. The contributions are mandatory and failure to make a contribution can result in the imposition of penalties.
Example: ABC Company’s plan formula is 4% of compensation. ABC must contribute 4% of all eligible employees’ compensation. ABC cannot elect to make a lower contribution for a particular year nor can they decide to make a higher contribution.
Like profit sharing plans, Social Security may be taken into account to provide a proportionately larger share of plan contributions to highly compensated employees.