Legal Definitions - money-purchase plan

A money-purchase plan is a type of employer-sponsored retirement savings program where an employer commits to contributing a fixed percentage of each eligible employee's annual compensation into their individual retirement account every year. Unlike some other retirement plans where employer contributions might be discretionary or tied to company profits, in a money-purchase plan, the employer's contribution rate is mandatory and predetermined by the plan document. The employee's eventual retirement benefit depends on the total contributions made over time, plus any investment gains (or losses) on those contributions. Employees typically direct how their funds are invested from a selection of options provided by the plan.

Here are some examples to illustrate how a money-purchase plan works:

• Example 1: Small Business Retirement Benefit

  Green Thumb Landscaping, a small business with 15 employees, establishes a money-purchase plan. The plan document states that the company will contribute 5% of each employee's annual salary to their individual retirement account, regardless of the company's profitability that year. For an employee earning $50,000, Green Thumb Landscaping is obligated to contribute $2,500 to their retirement account annually.

  This illustrates a money-purchase plan because the employer, Green Thumb Landscaping, has a mandatory and fixed contribution rate (5% of salary) that it must make for each eligible employee. The employees' retirement savings grow predictably based on this set percentage, rather than fluctuating with company performance.

• Example 2: Professional Firm's Consistent Contributions

  A well-established architectural firm, "Blueprint Designs," wants to provide a stable and predictable retirement benefit for its architects and administrative staff. They implement a money-purchase plan where the firm contributes 7% of each employee's gross pay into their retirement account annually, as specified in the plan's legal documents. This contribution is made consistently year after year, providing a reliable stream of retirement savings for their team.

  Here, Blueprint Designs is obligated to make a defined contribution (7% of gross pay) for every eligible employee each year. This commitment is a core feature of a money-purchase plan, ensuring a consistent and guaranteed employer contribution to employees' retirement savings, which then grows based on investment performance.

• Example 3: Long-Term Employee's Accumulation

  Maria has worked for "Tech Solutions Inc." for 20 years. Her company has a money-purchase plan that contributes 10% of her annual salary to her retirement account. Over two decades, even during years when the company's profits were lower, Tech Solutions Inc. consistently made this 10% contribution, allowing Maria's retirement savings to accumulate significantly through these regular contributions and the returns on her chosen investments.

  This example highlights the mandatory and consistent nature of employer contributions in a money-purchase plan. Despite varying company performance, Tech Solutions Inc. was legally bound to contribute the fixed 10% of Maria's salary each year, directly demonstrating how these predetermined contributions form the basis of an employee's retirement fund under such a plan.