What is a money purchase pension plan

A money purchase pension plan is a defined contribution plan in which the employer's contributions are mandatory and are usually based solely on each participant's compensation. The obligation to fund the plan makes a money purchase pension plan different from most profit sharing plans.

In most profit sharing plans, there are generally no unfavorable consequences for the employer if it fails to make a contribution. However, if the employer maintains a money purchase pension plan, its failure to make a contribution can result in the imposition of a penalty tax. Contributions must be made to a money purchase pension plan even if the employer has no profits. Forfeitures that occur because of employee turnover may reduce future contributions of the employer or may be used to increase the benefits of remaining participants.

Retirement benefits are based on the amount in the participant's account at the time of the retirement, i.e., whatever pension the money can purchase.