The Complete Guide to Money Purchase Plans [+401h]

A money purchase plan (often shortened to MPP) is an employer-sponsored retirement plan in which the company promises to contribute a fixed percentage of each employee's pay every year. If the plan document says the company will contribute 10% of compensation, the company must contribute 10% of compensation. Every year. No exceptions for a slow quarter or a tight budget.

That word "must" is the defining feature of the plan. In a profit-sharing plan, the employer decides each year whether to contribute and how much. In a money purchase plan, the contribution is written into the plan document as a firm commitment. Skipping it isn't an option — a missed contribution creates a funding deficiency, and the company can face penalties until it makes the plan whole.

Each employee has an individual account. Contributions go into that account, the money is invested, and the account grows (or shrinks) with investment performance. At retirement, the employee receives whatever the account is worth.

Here is where the money purchase plan gets interesting, and where most people get confused. An MPP is legally classified as a pension plan. At the same time, it is a defined contribution plan. Most people assume those two things are opposites. They aren't.

"Pension" does not mean "the employer guarantees a monthly check for life." In the retirement plan world, a pension is any plan where the employer's funding obligation is fixed and mandatory rather than optional. A traditional defined benefit plan qualifies because it promises a specific benefit at retirement. A money purchase plan qualifies because it promises a specific contribution every year. Both promises are binding; they just attach to different ends of the equation.

So the MPP occupies an unusual middle ground. Like a 401(k) or profit-sharing plan, each participant has an individual account, and the retirement benefit depends on investment returns — that's the defined contribution side. But like a traditional pension, the employer's obligation is locked in and enforceable — that's the pension side.

Key distinction: In a defined benefit plan, the benefit is fixed and the contribution varies. In a money purchase plan, the contribution is fixed and the benefit varies. Both are pensions, because in both cases the employer has made a binding promise.

Because a money purchase plan is a pension, it must satisfy a standard that applies to all pension plans: the benefit must be definitely determinable. In plain English, that means the plan's formula has to be spelled out precisely enough that anyone can calculate what the employer owes, with no discretion involved.

A defined benefit plan meets this standard by stating the benefit formula — say, a monthly payment at retirement based on salary and years of service. A money purchase plan meets it by stating the contribution formula — say, 10% of each participant's compensation. Either way, the number is determinable from the plan document alone. The employer cannot look at year-end profits and decide to contribute 4% this year and 12% next year. Whatever the document says is what the company pays.

This is exactly what separates an MPP from a profit-sharing plan, where contributions can be fully discretionary. It is also why the MPP inherits some other pension-style rules, which we'll get to in the distributions section below.

The mechanics of contributions are straightforward.

The formula is fixed. The plan document states a contribution percentage (or occasionally a flat dollar formula), and the employer funds it annually for every eligible employee. Common historical formulas ranged from 5% to 25% of compensation.

Only the employer contributes. A money purchase plan is funded entirely with employer dollars. Employees do not defer their own salary the way they would in a 401(k). Employer contributions are tax-deductible to the business and are not taxed to the employee until withdrawn.

Limits apply. The total amount added to any one participant's account each year is capped at the lesser of 100% of that person's compensation or an annual dollar limit that adjusts with inflation. The compensation that can be counted is also capped each year. And the business's deduction for contributions is limited to 25% of total eligible payroll — a number that will matter a great deal in the history lesson below.

Funding is mandatory. It bears repeating because it is the plan's biggest practical drawback. A profit-sharing plan lets a business skip a contribution in a bad year. A money purchase plan does not. For a business with unpredictable cash flow, that rigidity is a real risk.

Contributions vest according to a schedule in the plan document — either all at once after a few years or gradually over time — and participants direct or receive the investment results in their own accounts, just like any other defined contribution plan.

Distributions are where the plan's pension character shows up again, and where an MPP is more restrictive than the plans most business owners are used to.

Spousal protections apply. Because it is a pension, a money purchase plan must offer benefits in the form of a joint and survivor annuity for married participants — a stream of payments that continues for the surviving spouse. A participant can elect a lump sum instead, but only with the spouse's written, witnessed consent. Profit-sharing plans and most 401(k) plans can avoid this requirement; a money purchase plan cannot.

In-service access is limited. Money generally stays in the plan until the participant separates from service, reaches the plan's retirement age (or age 59½ if the plan allows in-service withdrawals at that point), dies, or becomes disabled. Hardship withdrawals of employer money — a familiar feature of 401(k) plans — are not available from a money purchase plan.

Taxes work as expected. Distributions are taxed as ordinary income. Withdrawals before age 59½ are generally subject to an additional 10% early-withdrawal penalty unless an exception applies. Balances can be rolled over to an IRA or another employer plan to keep the tax deferral going.

Required distributions eventually kick in. Like other tax-deferred plans, a money purchase plan requires participants to begin taking minimum withdrawals once they reach the required beginning age, currently 73.

Loans are permitted. If the plan document allows, participants can borrow from their accounts under the standard plan-loan rules.

To understand why money purchase plans exist at all, you have to go back to the era before 2002.

For decades, the deduction for profit-sharing plan contributions was capped at 15% of payroll — not the 25% we have today. That created a problem for businesses that wanted to contribute more. The solution was a two-plan structure that became a fixture of retirement plan design: pair a profit-sharing plan with a money purchase plan. A typical arrangement was a 10% mandatory money purchase contribution stacked on top of a discretionary profit-sharing contribution of up to 15%. Together, the combination reached the 25% overall deduction ceiling.

In other words, businesses didn't adopt money purchase plans because they loved mandatory contributions. They adopted them because the MPP was the only vehicle that unlocked the full deduction. The paired "MP/PS combo" was so common that many document providers sold the two plans as a matched set.

Then, in 2001, Congress passed a major tax law that raised the profit-sharing deduction limit from 15% to 25% of payroll, effective in 2002. Overnight, a profit-sharing plan alone could do everything the two-plan combo did — with none of the mandatory funding risk, none of the spousal consent paperwork, and one less plan document to maintain. The money purchase plan lost its entire reason for being. Businesses merged their MPPs into their profit-sharing plans by the thousands, and the plan type became, for most practical purposes, obsolete.

Honestly? For the vast majority of businesses, no.

Everything a money purchase plan can do on the contribution side, a profit-sharing plan or 401(k) profit-sharing combination can do with more flexibility. The same deduction limit, the same account-based structure, the same investment options — but without the locked-in funding obligation and without the pension-style distribution restrictions. When one option gives you the same ceiling with fewer strings attached, the choice is not close. That is why new money purchase plans are rare and most existing ones were merged away twenty years ago.

But "almost no reason" is not "no reason." There is one scenario where the MPP's pension status — the very thing that makes it rigid — becomes its selling point.

One thing that surprises many business owners is that a money purchase plan can be paired with a 401(k) plan, and the two can operate side by side for the same company. The 401(k) handles employee salary deferrals (and any matching or profit-sharing contributions the employer wants to make on a discretionary basis), while the money purchase plan layers a fixed, mandatory employer contribution on top.

This kind of pairing is exactly what makes the MPP-plus-401(h) strategy workable in practice. The business keeps the flexibility and employee-deferral features of a 401(k), while the money purchase plan supplies the pension status needed to host a 401(h) retiree medical account.

But here's the important limitation: running two defined contribution plans does not double your contribution capacity. Both plans are bound by the same Section 415 defined contribution limit, and that limit applies on a combined basis.

Section 415 caps the total "annual additions" — employer contributions, employee deferrals, and any forfeitures allocated to a participant — that can go into all of an employer's defined contribution plans for any one person in a single year. For 2026, that combined cap is the lesser of 100% of the participant's compensation or the annual dollar limit. If the money purchase plan contributes 10% of pay and the 401(k) receives deferrals and profit-sharing dollars, every one of those amounts counts against the same ceiling.

The practical takeaway is that the MPP/401(k) combination is about structure, not extra room. A participant cannot receive a full 415 limit in the 401(k) and then another full limit in the money purchase plan — the two plans share one bucket.

The deduction rules work similarly: the employer's total deductible contribution across both plans is generally limited to 25% of eligible payroll, with employee 401(k) deferrals sitting outside that calculation. So the reason to pair the plans is never to stuff more money in. It's to get something only a pension can offer — most commonly the 401(h) account — while keeping the 401(k) doing what it does best.

A 401(h) account is a special medical-expense account that can be attached to a pension plan. It allows an employer to set aside tax-deductible money to pay for retiree medical expenses — things like insurance premiums, doctor visits, prescriptions, and other qualified health costs in retirement. The contributions are deductible to the business, the money grows tax-free inside the plan, and when it is used for qualified medical expenses in retirement, it comes out tax-free as well. It is one of the few genuinely triple-tax-advantaged structures available, and for retiree healthcare funding it can be remarkably powerful.

Here's the catch: a 401(h) account can only ride along with a pension plan. You cannot bolt one onto a profit-sharing plan or a standalone 401(k), because those are not pensions. The host plan must be a defined benefit plan, a cash balance plan — or a money purchase plan.

That is the money purchase plan's modern niche. For a business owner who wants a 401(h) retiree medical account but does not want (or does not fit) a defined benefit or cash balance plan, the MPP is the simplest pension that qualifies as a host. It delivers the pension classification the 401(h) rules require, while keeping the familiar individual-account structure of a defined contribution plan. In practice, this is essentially the only reason a new money purchase plan gets established today.

Bottom line: Nobody adopts a money purchase plan for the retirement contributions anymore. When one is adopted today, it is almost always serving as the pension "host" that makes a 401(h) retiree medical account possible.

The money purchase plan is a study in how tax law shapes plan design. For decades it thrived, not on its own merits, but because it was the key that unlocked a bigger deduction. When the law changed in 2002 and profit-sharing plans could reach the full 25% limit on their own, the MPP's advantage vanished and the plan type all but disappeared.

What survived is a quirk of classification: the money purchase plan is a pension, and pensions can host 401(h) retiree medical accounts. For the right business owner — typically one focused on funding retiree healthcare with tax-advantaged dollars — that quirk is enough to justify the plan's mandatory contributions and extra administrative formality. For everyone else, a profit-sharing or 401(k) plan will do the same job with far less rigidity.

If you are weighing whether a money purchase plan (with or without a 401(h) account) fits your situation, talk it through with a retirement plan professional. The plan is a niche tool, but in its niche, nothing else quite replaces it.