Chapter 7: Money purchase plans

1
Chapter 7 Money purchase plans

• Last revised 10/7/01

2
The tax law treats money purchase pension plans
as both defined benefit and defined contribution
plans

• They are subject to the minimum funding and
  joint and survivor requirements of the tax law
  that apply to defined benefit arrangements
• Individual accounts must be maintained for
  employees, the plans are subject to the annual
  addition limits of Section 415 of the IRC, and
  they are not subject to the plan termination
  provisions of Title IV of ERISA

3
The sponsor's financial commitment under a money
purchase pension plan

• The employer agrees to make a fixed contribution
  each year for each eligible employee
• This contribution is usually expressed as a
  percent of pay, although it may be a flat dollar
  amount
• This constitutes a definite commitment on the
  part of the employer and the contribution must be
  made each year, regardless of profits, and cannot
  be varied except by plan amendment

4
Characteristics of mandatory contributions under
a money purchase pension plan

• The plan may require employees to make
  contributions in order to participate
• These contributions can be made only from
  aftertax income
• When employees do contribute the contribution
  rate is fixed (unlike the typical savings plan
  where the employee can choose from among
  different levels of participation).

5
Sponsor's choices with respect to employee
forfeitures under a money purchase pension plan

• forfeitures which arise when partially vested or
  nonvested employees terminate employment may be
  used to
• reduce employer contributions or
• may be reallocated among the remaining plan
  participants

6
Are sponsors required to make the investment
decisions for the participants of a money
purchase pension plan?

• As with other types of defined contribution
  plans, employees are frequently given a choice of
  several investment funds in which to invest their
  account balances

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What choice does a participant in a money
purchase pension plan have for the form in which
retirement benefits are received?

• If the employee retires, the employee will have
  the option of receiving this account balance in a
  lump sum or in the form of monthly installments

8
Are employees permitted to receive distributions
from their money purchase pension plan accounts
while still working for the sponsor?

• Unlike conventional profit sharing and savings
  plans, a money purchase plan generally cannot
  make distributions until the employee has severed
  employment

9
Arizona Governing Committee v. Norris

• changed the manner in which a participant's sex
  was used as a determinant of monthly benefits in
  a money purchase pension plan
• If a male and female employee were the same age
  and had exactly the same amount accumulated under
  such a plan, the male employee would receive a
  higher lifetime pension than the female employee
• Because of this difference in life expectancies,
  the actuarial value of the pension, in both
  cases, was considered to be the same
• In 1983, however, the Supreme Court ruled that
  life annuities under an employer-sponsored
  defined contribution plan must be provided on a
  uniform basis

10
If a money purchase plan involves after-tax
employee and matching employer contributions, an
actual contribution percentage test will have to
be satisfied each year

• described in Chapter 11

11
Are there restrictions on the amount of employer
securities that may be held by a money purchase
pension plan?

• Defined benefit plans are generally prohibited
  from having more than 10 percent of their assets
  invested in qualifying employer securities
• Money purchase plans, even though they are
  defined contribution plans, are subject to the
  same 10 percent limitation that applies to
  defined benefit plans