A money purchase plan is one in which the employer contributes a defined amount each year. The allocation may be a fixed percentage of each participant’s salary, a fixed dollar amount or integrated with social security. Contributions to the plan are mandatory and allow no discretion to the employer.
Historically, money purchase plans had been favored by employers who wish to maximize contributions under a defined contribution plan. However, recent law changes have increased the maximum contributions permitted to a profit sharing plan to equal that to a money purchase plan.
Currently, money purchase plans are used by employers who wish to have a pre-defined, fixed obligation.