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What is a Money Purchase Pension Plan?

Under a money purchase pension plan, a fixed percentage of compensation is contributed to the plan each year, regardless of profits. The contribution is paid by the company and is deductible by the company. The maximum allowable contribution to a single participant cannot exceed 25% of annual compensation or the annual addition limit in effect for that year ($41,000 in 2004). The disadvantage of the money purchase plan is that once the company decides on the percentage contribution, it becomes fixed for subsequent years unless amended. Even if the revenues from the business are down, the employer is still obligated to make the contribution in the required amount. Failure to meet the contribution, or duning requirements will result in an excise tax on the deficiency.


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