Money Purchase Plan

Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and the firm contributes at the same or a different rate. Also called an individual account plan.

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Money Purchase Plan

An employer-contribution retirement plan in which the employer is required to place a certain amount in the retirement account each year. Usually this is a certain percentage of the employee's wages or salary. The employer is required to contribute the agreed-upon amount regardless of how the company performs in a given year. This reduces the risk for the account holder, but increases the risk for the employer. It is also called an individual account plan.

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money purchase plan

A defined-contribution pension plan in which the employer contributes a specified amount of cash rather than shares of stock or a percentage of profits.

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Money purchase plan. A money purchase plan is a defined contribution retirement plan that requires the employer to contribute a fixed percentage of each employee's salary every year the plan is in effect.

The contributions must be made regardless of how well the company does in a given year. In contrast, in profit-sharing plans, the employer's contribution is more flexible because it is based on annual profits.

However, some small-company employers or self-employed people create a paired plan that combines money purchase with profit sharing. Paired plans require them to add at least a minimum percentage of each employee's salary to the plan each year.