Money Purchase Plan Definition

A money purchase pension plan, also known as a defined contribution plan, requires employers to contribute a fixed percentage of eligible employees' salaries to individual accounts. These contributions are tax-deductible for the employer and tax-deferred for the employees, allowing investments to grow tax-free until retirement. However, the plan must also pass "top-heavy" tests to ensure that highly paid employees do not receive significantly more contributions than lower-paid employees. Failure to comply can result in penalties from the Internal Revenue Service. While money purchase plans were once commonly combined with profit-sharing plans for higher contribution limits, recent changes have made simpler plans more appealing.