You may not have heard of money purchase pension plans, but they are a powerful retirement savings offering. MPPPs are qualified retirement savings plans like 401(k)s that you contribute to each year for your employees, the plan participants. They help your employees save for retirement. You may decide to offer an MPPP in conjunction with a profit-sharing or 401(k) plan.
Contributions to MPPPs are fixed on an annual basis. You contribute by putting a set percentage, determined by the plan documents, of each eligible employee’s salary into their account. It’s important to note that the contribution is required regardless of how your employees or your company performs; even if profits are low, you must make the minimum contribution requirement.
Some MPPPs allow for employee contributions; all allow employees to choose their account’s investments from among the plan options. Employees will pay a penalty if they withdraw money before retirement, but you may approve loans from their accounts. Employees don’t pay taxes on the money until it’s distributed. They must begin taking distributions by 70 1/2 years old, though they may begin as early as 59 1/2. Distributions are taxed as ordinary income.
A vesting schedule dictates when certain percentages of an MPPP will be available to an employee. Vesting, a common feature among 401(k) plans, encourages employees to stay with your company. Another benefit to your company is that your contributions to an MPPP are tax deductible.
These programs can be pricey to maintain; they require a significant amount of administration and recordkeeping. Smaller businesses might choose to use a prepackaged plan.
How the numbers work
Contributions to MPPPs are subject to annual limits established by the IRS. In 2024, it’s the lesser of 25% of compensation or $69,000, subject to cost-of-living adjustments. As with any defined contribution plan, IRS rules require that the MPPP not become top heavy, favoring highly compensated employees over workers with lower annual salaries. If, for instance, more than 60% of the total assets are owned by you and highly compensated employees, you and your employees could be subject to penalties.
If you offer your MPPP with other plans, your contributions are limited to the maximums across all accounts. Employees in companies with multiple plans can contribute their maximum to employee contribution plans and still receive the maximum employer contributions.
One important difference between 401(k)s and MPPPs is that employees cannot roll over their MPPP balance when they leave your employ; they must take a lump-sum payout.
The benefits
MPPPs are not as well-known as 401(k)s, which have become prevalent and popular for their flexibility and lower administrative costs. But MPPPs are efficient vehicles for retirement saving. MPPPs boost your talent ranks by adding strength to any job offer, encouraging candidates to join your company.
If you can withstand the additional administrative costs and contribution minimums, these plans are worth considering for your benefits portfolio. You may wish to consult with a financial adviser to help you build a solid plan and with a tax consultant who will complete an IRS Form 5500, Annual Return/Report of Employee Benefit Plan, each year.
