How to Learn About Conversions and Mergers Involving Money Purchase Plans in Your Market

Before retirement plan provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) took effect on 12/31/01, the choice between money purchase and profit-sharing plans was fairly clear. Money purchase plans allowed employers to deduct up to 25% of the aggregate taxable compensation of employees covered by the plan, provided employers agreed to make required annual contributions for all eligible employees. Profit-sharing plans allowed more flexibility in employer contributions. In any given year employer contributions could drop as low as zero, but the maximum deduction was limited to 15% of aggregate taxable compensation.

This made money purchase plans preferable in many companies with steady year-to-year profits and a desire to set aside as much money as possible for owners and other highly compensated employees (HCEs). On the other hand, profit-sharing plans were favored by companies that wanted more flexibility in year-to-year funding.