A money purchase retirement plan is a defined contribution plan where employer contributions are fixed at a set percentage of each employee's compensation, as stated in the plan document. Unlike profit-sharing plans, the contribution is mandatory every year regardless of company profits.
Many business owners are surprised to learn the IRS limits annual additions to these plans — for 2024, the limit is the lesser of 100% of compensation or $69,000 per participant.
The problem most readers face is confusion: how is a money purchase retirement plan different from a 401(k) or profit-sharing plan, and why would anyone choose a rigid contribution formula?
This guide breaks down five essential facts — how contributions work, the tax rules, vesting, who the plan fits best, and how it compares to alternatives — so you can decide whether a money purchase retirement plan deserves a place in your retirement strategy.
1. Contributions Are Mandatory and Fixed by Formula
The defining feature of a money purchase pension plan is that the employer must contribute the percentage of compensation written into the plan document — commonly anywhere from 3% to 25% of pay. The IRS explains that a money purchase plan "requires mandatory contributions" and that this is what distinguishes it from a profit-sharing plan, where contributions are discretionary (IRS.gov).
In other words, when you adopt a money purchase retirement plan, you are contractually committing to fund it.
Because contributions are required every year, this plan type delivers predictable retirement funding for employees. But for the employer, a money purchase retirement plan creates an obligation that survives bad business years.
How to apply this: before adopting one, model the annual contribution cost of your money purchase retirement plan at your current payroll, then stress-test it against a 20% revenue decline.
2. Contribution Limits Follow IRS Defined Contribution Rules
Money purchase plans follow the same limits as other defined contribution plans. Annual additions per participant in a money purchase retirement plan are capped at the lesser of 100% of compensation or the annual dollar limit — $69,000 for 2024 and $70,000 for 2025, per IRS Notice 2024-80 and related guidance.
Compensation counted toward the limit is itself capped ($345,000 in 2024).
Key limits at a glance:
| Rule | Limit (2024) | What to check |
|---|---|---|
| Annual addition cap | Lesser of 100% of pay or $69,000 | Confirm your formula fits within it |
| Compensation cap | $345,000 | Use capped pay in calculations |
| Catch-up (age 50+) | $7,500 | Not applicable — money purchase plans generally don't allow catch-ups |
| Combined DC plan limit | $69,000 across plans | Coordinate with your 401(k) |
How to apply this: if you sponsor a 401(k) too, the 415 limit applies across all defined contribution plans, so coordinate totals before setting the money purchase retirement plan formula.
3. Vesting Can Be Immediate or Scheduled
Employer contributions to a money purchase plan vest according to the schedule in the plan document. Sponsors may choose immediate vesting, cliff vesting (up to three years under ERISA), or graded vesting (up to six years, reaching 100% by year six).
A common scenario: a small practice adopts a 10% money purchase formula with three-year cliff vesting to encourage employee retention. Employees who leave before year three forfeit unvested amounts from the money purchase retirement plan, which are reallocated to remaining participants rather than returned to the employer.
Vesting schedules must satisfy ERISA minimums even though these plans historically allowed slightly longer schedules — always verify your document against current Department of Labor rules (DOL).
How to apply this: if retention matters, pair a fixed contribution formula with a vesting schedule; if hiring competitors' talent, use immediate vesting in your money purchase retirement plan as a selling point.
4. Taxes Work Like Other Defined Contribution Plans
Contributions to a money purchase retirement plan are tax-deductible to the employer and generally tax-deferred for the employee — no income tax is owed until funds are withdrawn. Earnings compound tax-free inside the plan, and participants typically cannot access money before retirement without penalties.
Withdrawal rules to know:
- Distributions before age 59½ generally trigger a 10% early-withdrawal penalty plus ordinary income tax.
- Required minimum distributions (RMDs) generally must begin at age 73 under the SECURE 2.0 Act timeline.
- Rollovers to an IRA or another employer plan are allowed when leaving the employer.
Because employee deferrals aren't the mechanism here (unlike a 401(k)), the entire contribution comes from the employer — which is why these plans often appeal to owners wanting to fund more for themselves and their team.
How to apply this: run your expected money purchase retirement plan contribution through a tax projection with your CPA to quantify the deduction before year-end payroll deadlines.
5. Who This Plan Fits — and How It Compares
A money purchase plan best fits stable, profitable businesses that want to maximize deductible contributions and commit to a fixed funding obligation. Partnerships, medical practices, and established firms often pair a money purchase retirement plan with a 401(k) to push total contributions toward the IRS maximum.
Compare the main options:
| Plan type | Employer commitment | Best for | Action to take |
|---|---|---|---|
| Money purchase | Mandatory fixed % | Max funding, stable income | Model annual cost first |
| Profit-sharing | Discretionary | Variable cash flow | Ask your TPA about flexibility |
| Safe harbor 401(k) | Mandatory match/non-elective | Employee deferrals wanted | Compare match cost |
| SEP IRA | Discretionary, up to 25% | Simplest administration | Check self-employed limits |
Providers like Fidelity and Vanguard offer small-business plan setup, and a third-party administrator (TPA) handles testing and Form 5500 filings for your money purchase retirement plan.
How to apply this: request quotes from two TPAs and ask specifically how a combined 401(k) plus money purchase design would affect your administration fees.
Frequently Asked Questions About money purchase retirement plan
Can I change the contribution percentage later?
Yes, but only through a formal plan amendment — and future accrual rules under Section 411(d)(6) restrict reducing certain benefits. Many sponsors amend formulas when profits decline, though an amendment can't strip already-earned benefits. If flexibility is your priority, a money purchase retirement plan may be the wrong vehicle.
What happens if my business can't make the required contribution?
You're generally required to fund it anyway; missed contributions can trigger excise taxes and disqualification risk. In severe hardship cases, a sponsor may request a funding waiver from the IRS or freeze the plan prospectively. Talk to your TPA immediately rather than simply skipping the deposit.
How does this differ from a traditional pension?
A traditional defined benefit pension promises a specific monthly benefit at retirement and requires actuarial funding calculations. A money purchase retirement plan instead defines the contribution, so the account balance — not a promised benefit — becomes the retirement amount. Investment risk sits with the employee, not the employer.
Can employees contribute their own money?
No — employees cannot make salary deferrals into a money purchase plan, since funding comes solely from employer contributions. If you want employee deferrals, you need a 401(k) feature alongside it. Many combined designs let staff defer into the 401(k) while the employer funds the fixed formula of the money purchase retirement plan.
What happens to the account when an employee leaves?
The vested balance belongs to the employee, who can leave it in the plan, roll it to an IRA, or move it to a new employer's plan. Unvested amounts are forfeited and typically reallocated. Small balances in a money purchase retirement plan may be cashed out with consent rules applying.
Conclusion
The money purchase retirement plan is a powerful but demanding tool: mandatory contributions deliver maximum funding potential, at the cost of year-to-year flexibility.
Key takeaways:
- Contributions are fixed by formula and mandatory every year, with the IRS annual addition cap applying.
- Vesting can reward retention, and taxes mirror other defined contribution plans.
- A money purchase retirement plan fits stable businesses best, often paired with a 401(k).
- Compare against profit-sharing and SEP options before committing.
Your next step: schedule a consultation with a TPA or your accountant this month to model whether a fixed-contribution design fits your cash flow — and get a written cost projection before you adopt a money purchase retirement plan.
