A Money Purchase Pension Plan (MPPP) allows an employer to make contributions up to 25% of eligible employees’ compensation. However, once the contribution level has been set, it cannot be decreased or discontinued without a formal prospective pronouncement under ERISA 204(h). In simple terms, this means that the contributions are not based on a company’s profitability and once committed to, contributions have to be made regardless of how much profit the company is making.

Prior to enactment of EGTRRA (The Economic Growth and Tax Relief Reconciliation Act of 2001) these plans were commonly used in combination with a profit sharing plan as a means of getting business owners the maximum of 25% contribution in a plan. Because Profit Sharing plans used to only allow for up to 15% of eligible compensation into the plan, some companies would then incorporate an MPPP for 10%, which would bring the total possible to 25% of pay. Thus the 10% in the MPPP was a mandatory contribution and the 15% in the Profit Sharing plan was discretionary and could be adjusted year to year based on the company’s profitability. However, EGTRRA now allows standard profit sharing plans to have contributions of up to 25% of eligible payroll in the plan without the need to have the separate MPPP with less flexibility.

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