In a money purchase pension plan, how does the employer make contributions?

In a money purchase pension plan, the employer is required to contribute a fixed percentage of each participant's compensation every year. This means contributions are predictable and consistent, providing a structured way to save for retirement. The chosen percentage is established at the outset of the plan and remains the same throughout the participant’s tenure in the plan, ensuring that every eligible employee receives a specified amount based on their earnings.

This approach contrasts with matching contribution plans, where the amount the employer contributes is contingent upon employee contributions; in a money purchase plan, the employer's obligation is to make contributions regardless of whether employees contribute anything themselves. This feature makes the plan beneficial for employees, as it guarantees employer contributions that help build retirement savings over time. Additionally, contributions made by the employer are typically tax-deductible, enhancing its value for the employer as well.