Module 1 - An Overview of Retirement Planning.docx

Mppps also offer a contribution formula which is a

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MPPPs also offer a contribution formula which is a set percentage of compensation. For example, the employer might contribute 5% of all eligible employee's salaries into the plan. Second, money purchase plans are becoming as rare in practice as defined benefit plans. A Profit Sharing plan, which you will learn about in the next lesson, offers much more flexibility than a MPPP without the constraint of a required contribution. Some employers have chosen to offer money purchase plans because they are contractually obligated to provide a certain benefit…so the required contribution is a moot point. Some employers have chosen to offer both an MPPP and a profit sharing plan to provide a base benefit with the option of additional savings if the right business conditions exist. Unlike the defined benefit plans, there is no provision for past service. All contributions are based on each year’s gross compensation. The employer’s contributions into a MPPP are always based on a certain percentage of annual compensation. If the employer chooses to contribute 3% of compensation for an employee who earns $50,000 per year, then the annual contribution will be $1,500 (3% x $50,000). The employer is limited to a maximum contribution percentage of 25% of gross compensation, and they can make tax-deductible contributions up to the 415(c) limit. With a money purchase pension plan, each participant will have their own account where their employer’s contributions are deposited. They then have the potential to benefit from any increases in investment performance that their investment selections may produce. However, this means that the employee will bear the full risk of the performance of the investments. They could gain from over- performance just as they could be hurt by under-performance. There is no provision for in-service withdrawals with a MPPP. The balance cannot be withdrawn until retirement. However, MPPPs are permitted to offer plan loans. From the employer’s perspective, the costs of administering a money-purchase pension plan are predictable. After the enactment of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, which among other things raised the pre-tax contribution limits, many employers chose Profit Sharing plans over MPPPs unless they had contractual obligations to provide a certain benefit anyway. In this instance, they could always employ a MPPP and then add a Profit Sharing plan to add an additional year-by-year discretionary benefit if they so choose.
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Target-Benefit Plan A target-benefit (TB) plan is a hybrid plan type. It is technically a defined-contribution type plan where each employee has their own account, but it feels like a defined benefit plan because the employer makes all of the contributions. The actual contribution is determined by actuarial calculations of what contributions would be necessary to provide a certain annuitized benefit (the target) in retirement.
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  • Spring '14

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