Money Purchase Plan
A Money Purchase Plan is a type of IRS-qualified defined contribution plan under IRC Section 401(a) in which the employer is required to make a fixed annual contribution equal to a specified percentage of each eligible employee's compensation, regardless of company profitability. The mandatory nature of the contribution obligation distinguishes money purchase plans from profit-sharing plans, which allow discretionary contributions.
Money purchase plans share the same basic regulatory framework as profit-sharing plans — contributions are deposited to individual participant accounts, assets are invested at the participant's or plan administrator's direction, and the ultimate benefit depends on contributions plus investment performance rather than a formula tied to salary and years of service. However, the defining characteristic of a money purchase plan is that the contribution formula is fixed in the plan document. If the plan specifies a 15% employer contribution, the employer must contribute 15% of each covered employee's compensation every year, regardless of whether the business is profitable. Failure to make required contributions can result in excise taxes under IRC Section 4972.
The contribution limit for money purchase plans follows the same rules as profit-sharing plans: the lesser of 25% of the participant's compensation or the annual additions limit ($70,000 in 2025). Because the contribution is mandatory and fixed, money purchase plans provide employees with a more predictable retirement benefit accrual than profit-sharing plans, where the employer can reduce or eliminate contributions in lean years. However, this same predictability creates a fixed cost obligation for the employer that can be burdensome during economic downturns.
Money purchase plans were historically more common before 2002, when they offered a higher deductible contribution limit (25% of compensation) compared to profit-sharing plans (15% of compensation at the time). The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) equalized the deductible limits for both plan types at 25% of compensation, removing the primary financial incentive to choose a money purchase plan over a profit-sharing plan. Since then, many employers have converted existing money purchase plans to profit-sharing plans to eliminate the mandatory contribution obligation while retaining the same maximum contribution capacity.
Many money purchase plans that remain in operation today are legacy plans that predate the 2002 law change or are maintained by employers who value the forced-savings discipline of the mandatory contribution formula. Government entities, school districts, and certain nonprofit organizations also maintain money purchase plans as part of their employee benefit structures, sometimes in combination with defined benefit plans. In those settings, the certainty of the contribution formula supports transparent employee compensation comparisons and collective bargaining agreements.
Participants in money purchase plans are subject to the same vesting schedule rules as profit-sharing plans, with employers choosing either a three-year cliff vest, a two-to-six-year graded vest, or immediate vesting. Distributions follow the same rules as other qualified plans, with distributions taxed as ordinary income, 10% early withdrawal penalties for distributions before age 59-1/2 (subject to exceptions), and Required Minimum Distributions beginning at age 73 under the SECURE Act 2.0 rules effective for 2023 and beyond.