In the landscape of retirement savings in the United States, the term “money purchase retirement plan” often causes confusion because it’s less common than 401(k)s or IRAs. But understanding how a money purchase pension plan (MPPP) works can help business owners and employees make more informed choices. I’ve spent years analyzing retirement accounts both as a financial expert and as someone navigating my own retirement strategy. This article reflects what I’ve learned, laid out in plain language, with concrete math, U.S.-centric context, and real-world examples.
Table of Contents
What Is a Money Purchase Retirement Plan?
A money purchase retirement plan is a defined contribution retirement plan. It requires the employer to contribute a fixed percentage of an employee’s compensation annually, regardless of profits. Unlike profit-sharing plans where contributions are discretionary, MPPP contributions are mandatory.
Who Should Use It?
From my perspective, a money purchase plan makes the most sense for:
- Small business owners seeking predictable retirement savings for themselves and employees
- Employers looking to incentivize long-term employee retention
- Professionals with high, stable income who want to maximize tax-deferred retirement savings
Contribution Mechanics
Let’s go into numbers. Suppose an employer agrees to contribute 10% of each employee’s annual salary into the MPPP. If an employee earns $80,000 per year, the employer must contribute:
Contribution = 0.10 \times 80,000 = 8,000This contribution is required every year, irrespective of the company’s profits.
IRS Contribution Limits
As of 2025, the IRS caps total employer contributions to defined contribution plans, including money purchase plans, at the lesser of:
\text{Limit} = \text{25\% of compensation or }\ \$69{,}000(Reference: IRS Publication 560)
Comparison Table: MPPP vs. Other Plans
| Feature | MPPP | 401(k) | SEP IRA | SIMPLE IRA |
|---|---|---|---|---|
| Employer Required Contribution | Yes | No | Yes | Yes |
| Employee Contributions | No | Yes | No | Yes |
| Max Annual Employer Contribution | $69,000 or 25% | $69,000 | $69,000 | $16,000 |
| Vesting Schedule | Allowed | Allowed | Immediate | Immediate |
| Subject to Nondiscrimination Rules | Yes | Yes | Yes | No |
Compliance and Regulation
Money purchase plans are subject to ERISA requirements and nondiscrimination testing. Employers must file IRS Form 5500 annually and conduct annual plan audits if they have 100 or more participants. Failure to contribute the promised percentage results in penalties and disqualification of the plan’s tax benefits.
Tax Implications
From my own experience, tax-deferred growth is the strongest feature of MPPPs. The employer’s contributions are deductible as business expenses. The employee pays no income tax on the funds until withdrawal. Assuming a long-term capital accumulation strategy, the tax deferral provides substantial compound growth benefits.
Example: Tax Deferral in Action
Let’s say an employer contributes $10,000 annually for 30 years. Assuming a 6% average annual return:
FV = P \times \left(\frac{(1 + r)^n - 1}{r}\right)Where:
P = 10,000 r = 0.06 n = 30 FV = 10,000 \times \left(\frac{(1.06)^{30} - 1}{0.06}\right) = 10,000 \times 79.058 = 790,580So, $300,000 in total contributions becomes $790,580 in a tax-deferred account.
Vesting and Portability
Employers can use a vesting schedule to encourage employee retention. A common vesting structure is 20% per year over 5 years. If an employee leaves after 3 years, they’re entitled to 60% of the balance.
Example
An employee’s account is worth $30,000 after 3 years. If the vesting schedule is 20% per year:
Vested = 0.60 \times 30,000 = 18,000They can take $18,000; the remaining $12,000 is forfeited and redistributed within the plan.
Withdrawal Rules and Penalties
Like traditional retirement plans, withdrawals before age 59½ are subject to a 10% early withdrawal penalty plus ordinary income taxes. Required minimum distributions (RMDs) begin at age 73 (per SECURE 2.0 Act).
Real-Life Scenario: Business Owner Strategy
I advised a client who owns a medical practice with five employees. She earns $250,000/year and wants to save aggressively for retirement while also offering a benefit to her staff.
She set a 15% employer contribution:
For herself:
0.15 \times 250,000 = 37,500For each employee earning $60,000:
0.15 \times 60,000 = 9,000Total contribution for 5 employees:
5 \times 9,000 = 45,000Total plan cost:
37,500 + 45,000 = 82,500She deducted the full $82,500 from her taxable income, and used the vesting schedule to protect against turnover.
Advantages and Drawbacks
Advantages
- Predictable employer contributions
- Significant tax deferral
- Encourages long-term retention
Drawbacks
- Inflexibility in economic downturns
- Administrative burden and compliance cost
- No employee contributions
Historical and Legislative Context
Money purchase plans were more popular before 2002, when EGTRRA allowed profit-sharing plans to match the same contribution limits. Since profit-sharing plans offer flexibility, many employers switched. But for some, especially those wanting structure and discipline, MPPPs still offer value.
Optimizing with Other Retirement Tools
I often recommend pairing a money purchase plan with a 401(k). Although this requires separate administration, it allows employees to contribute pretax income and boosts overall savings potential. Together, an employee could receive 25% from the employer and contribute $23,000 on their own (2025 limit).
Final Thoughts
For disciplined savers and structured employers, money purchase plans can be a powerful retirement vehicle. They’re not as flexible as 401(k)s or IRAs, but they reward consistency and long-term thinking. The math speaks for itself. With careful planning, an MPPP can become a cornerstone of a secure retirement.
