Defined Contribution Plans
Money Purchase Plans
Money Purchase Pension Plans are sometimes referred to as pension plans. The contribution is made by the employer to the plan and allocated to the participants based on a formula. The contribution is defined by the formula stated in the plan and must be made each year. Employee after-tax contributions may be made, but must pass anti-discrimination test. This type of plan may be sponsored by any employers, even those in the non-profit or governmental sectors.
All Money Purchase Plans must have a definitely determinable allocation formula. That is, the formula used to allocated contributions to the individual participants must be specified in the plan document. there are various methods available to allocate the contributions. The benefit provided at normal retirement age is an account balance. There is no guarantee of benefits at normal retirement.
Allocation by Compensation
The IRS has defined allocating the employer non-elective contribution by a relationship of a participant’s compensation divided by the total of all participants’ compensation as non- discriminatory method. The formula in the plan is fixed as a percentage of covered pay. Compensation must be limited to $250,000 for the 2012 plan year.
Integration with Social Security
Current regulations permit integration with Social Security, that is the effect of Social Security on plans can be built into the allocation formula for the employer contribution. The plans take into consideration the fact that Social Security provides a larger percentage of pay for the lower paid individuals and a smaller percentage of pay at the higher pay levels at retirement.
The plans are permitted to discriminate in favor of the highly compensated within the limits provided by the IRS code. The percent of total covered pay and the percent allocated above the taxable wage base is stated in the plan document and is fixed. This formula will yield a larger amount as a percent of pay to the higher paid participants.
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