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Money Purchase Pension Plans

A Money Purchase Plan design is a defined contribution pension plan. We used to suggest a company with solid annual profits include a Money Purchase Plan in combination with a 401(k) or other Profit Sharing format to maximize contributions and deductions.

Contributions are a fixed commitment that must be met each year for as long as the plan is in operation. The plan specifies a contribution formula which may be amended periodically.
The maximum tax-deductible contribution which can be made is 25% of the compensation of all the employees eligible to participate in the plan up to $42,000 for each account in 2005.
Contributions are not included in employees' income for income tax or Social Security tax purposes.
Earnings in the plan grow on a tax-deferred basis.
The plan enhances the company's ability to attract and retain 'top-notch' employees.

In our opinion, since the EGTRRA Tax Act of 2001 while there is no significant reason to continue a money purchase pension plan as the more flexible 'profit sharing' plan design provides for the same contribution limits and permits discretionary funding during difficult cash flow periods, there may be specific situations where money purchase plans still serve a purpose. One of those situations may exist if the employer desires to provide a substantial and definite contribution for the plan participants.

Filing Requirements: Annual filing of Form 5500 may or may not be required.

Who May Not Have To File
You do not have to file Form 5500-EZ (or Form 5500) for a plan year (other than the final plan year) that begins on or after January 1, 2007, if you meet the five conditions above and you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year.

Example for plan years beginning on or after January 1, 2007. If total assets in a plan (or in two or date more plans, separately or together), that otherwise
satisfies the requirements for filing the Form 5500-EZ, exceeded $250,000 at the end of the 2007 plan year, a Form 5500-EZ must be filed for the 2007 plan year.

Final plan year. All one-participant plans should file the Form 5500-EZ for their final plan year indicating that all assets have been distributed. The final plan year is the year in which distribution of all plan assets is completed. Check the “final return” box at the top of Form 5500-EZ if all assets under the plan(s) (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or distributed to another plan.

Source: www.IRS.gov

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Wednesday, January 02, 2008 11:23 AM