Why Money Purchase Plans Don't Get the Seasoning Exceptions Profit-Sharing Plans Do

Money Purchase Plans are a type of defined contribution retirement plan where employers commit to contributing a fixed percentage of each employee's compensation annually. This commitment makes the contributions mandatory, regardless of the company's profitability or economic performance. It's a promise to contribute, and that promise has specific implications for how the IRS views these plans.

Because the contribution formula is set in advance and is obligatory, there's a predictable, non-discretionary nature to the funding of these plans. This predictability is a key differentiator when compared to other types of employer-sponsored retirement plans, especially concerning certain tax advantages and flexibility rules.

In the context of retirement plans, 'seasoning' generally refers to the period during which plan assets must remain within the plan before certain distributions or transfers can be made without penalty or specific tax implications. Seasoning exceptions are provisions that allow some plans to bypass or shorten these waiting periods under certain conditions.

These exceptions are often designed to provide flexibility or address specific circumstances, particularly for plans where contributions are more discretionary. They can be a significant advantage for plan sponsors and participants, allowing for more agile management of retirement funds. However, not all plan types are eligible for these exceptions, as we'll explore.

The fundamental reason Money Purchase Plans don't benefit from seasoning exceptions lies in their contribution structure. As mentioned, contributions to a Money Purchase Plan are fixed and nondiscretionary. The employer legally obligates itself to make these contributions annually.

In contrast, Profit-Sharing Plans offer discretionary contributions. Employers decide each year whether (and how much) to contribute, typically based on the company's profits. This flexibility is precisely why Profit-Sharing Plans can qualify for seasoning exceptions, especially when it comes to moves like transferring assets to a 401(h) account. The IRS sees the predictable, mandatory nature of Money Purchase Plan contributions as different from the variable, discretionary contributions of Profit-Sharing Plans.

When considering the integration of a 401(h) account for retiree health benefits with a qualified retirement plan, the distinction between Money Purchase and Profit-Sharing Plans becomes particularly relevant. Funds transferred to a 401(h) must generally be 'seasoned' funds — meaning they have been in the plan for a certain period and meet specific IRS criteria.

Because Money Purchase Plans involve mandatory, fixed contributions, the IRS does not typically view these contributions as eligible for the same seasoning exceptions that can apply to Profit-Sharing Plans when making transfers to a 401(h) account. This can limit the flexibility and timing of funding retiree medical benefits through a Money Purchase Plan, making them a less ideal vehicle for this specific strategy compared to their more flexible counterparts.

While Money Purchase Plans have their advantages, their lack of seasoning exceptions can be a drawback for those seeking maximum flexibility, particularly with 401(h) integration. For small business owners and high-income earners, a hybrid plan combining elements of both a Money Purchase Plan and a Profit-Sharing Plan might offer the best of both worlds.

Such a strategy could allow for a stable, mandatory contribution component (like a Money Purchase Plan) while also incorporating a discretionary component (like a Profit-Sharing Plan) that could be eligible for seasoning exceptions and provide greater flexibility for funding retiree health benefits through a 401(h) account. Consulting with a qualified retirement plan advisor is crucial to designing a plan that meets your specific financial goals and compliance needs.