What is a Money Purchase Pension Plan?
Under a money purchase pension plan, a fixed
percentage of compensation is contributed to the plan each year,
regardless of profits. The contribution is paid by the company and
is deductible by the company. The maximum allowable contribution
to a single participant cannot exceed 25% of annual compensation
or the annual addition limit in effect for that year ($41,000 in
2004). The disadvantage of the money purchase plan is that once
the company decides on the percentage contribution, it becomes fixed
for subsequent years unless amended. Even if the revenues from the
business are down, the employer is still obligated to make the contribution
in the required amount. Failure to meet the contribution, or duning
requirements will result in an excise tax on the deficiency.