Replacing a Money Purchase Plan: A Practical Guide
ABA Trust & Investments (04/03) Vol. 32, No. 4 p.34; Weiser, Carol A.; Neis, Robert J.

When it comes to deciding whether to replace a money purchase plan with a profit-sharing plan, understanding the restrictions that apply to plan contributions and other limits on plan operations is vitally important. Before the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was signed into law, money purchase pension plans were widely considered a profitable way to maximize deductible contributions to a qualified defined contribution plan. As a rule, the Internal Revenue Code limits the total deductible contributions to a profit-sharing plan to 25 percent of the compensation of all participants. The same rule now applies to money purchase plans. Prior to EGTRRA, the effective limit on deductions for money purchase plans was set according to IRC Section 404(a)(1) and was based on the amount required to be contributed under the plan formula, instead of a specific percentage of compensation. For employees who earn $160,000 or more, being knowledgeable about these limits is important because the EGTRRA changes allow the employer to make the maximum IRC Section 415 contribution of $40,000 as a deductible contribution under a profit-sharing plan. Moreover, an employer may want to replace the money purchase plan with a profit-sharing plan if the employer maintained a money purchase plan for the sole purpose of maximizing contributions, because the IRC imposes obligations and procedural requirements on money purchase plan sponsors and participants that are not generally applicable to profit-sharing plans.

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