A money purchase plan is a qualified employer sponsored plan. Unlike a discretionary contribution to a profit sharing plan, a contribution to a money purchase plan is required. The contribution is usually a percentage of each participant’s compensation. Failure to make the required contribution can result in the imposition of a penalty tax. Earnings accumulate tax-free until distributed from the plan and are then taxed as part of the employee’s regular income. Whether withdrawals are made during a participant’s employment or while still employed, depends on the terms of the plan. Annuity options are the normal form of retirement benefits, but a lump sum and other options are available if offered by the plan and if the necessary waivers and elections are made.
Each plan has a trustee who is generally responsible for managing the plan assets and for ensuring various financial and tax documents are prepared. Other administrative duties are overseen by a plan administrator, who will frequently hire a third-party administrator to perform most administrative functions such as preparing the annual tax return and plan document.