Money purchase plans were more popular thirty years ago than they are today. Congress made the 401(k) and the discretionary profit-sharing plan more attractive in 2002, and most employers either converted their money purchase plans or folded them into combination designs. The plans that remain usually exist because they're written into a collective bargaining agreement, or because an employer specifically wants the predictability of a fixed contribution formula. If you're the HR or finance lead reviewing one today, the real question is whether the rigid funding requirement still matches the company's cash flow reality.
How Money Purchase Plans Actually Work The employer commits to a contribution formula in the plan document, typically a percentage of each eligible participant's compensation. That percentage can range from 1% up to the IRS ceiling, and once it's set, the employer has to fund it every plan year regardless of business performance. Contributions go into individual participant accounts, and the employee directs investment choices from a menu of options. Employees don't contribute unless the plan is a combination design that layers 401(k) deferrals on top.
The closest comparison is the 401(k) with a discretionary match, where the match can flex year to year and participants fund most of the account themselves. A profit-sharing plan goes further in the employer's direction: no contribution is promised in any given year. Money purchase sits between a traditional pension and a 401(k), with the employer bearing the contribution risk but not the investment risk.
Who Still Uses Money Purchase Plans in 2026 Money purchase plans are most common in unionized industries where the contribution formula is locked in by contract: construction, transportation, and certain manufacturing sectors. They also show up in professional service firms where partners want a floor of guaranteed retirement contributions without the administrative overhead of a cash balance plan.
For small-business owners, the mandatory contribution is usually the dealbreaker. A good year and a bad year demand the same percentage of pay. Employers who want retirement contributions that flex with business results typically pick a profit-sharing plan or a SIMPLE IRA instead, and reserve money purchase designs for situations where the predictability is a feature, not a bug.
How Money Purchase Contributions Flow Through Payroll Employer contributions to a money purchase plan aren't part of the employee's taxable wages and don't appear in Box 1 of the W-2. They're reported on Form 5500 at the plan level and show up on the participant's year-end retirement statement. From a payroll perspective, the main operational concern is defining compensation correctly in the plan document. Bonuses, commissions, and certain fringe benefits may or may not count, and getting that wrong creates correction headaches later.
What's the 2026 Contribution Cap? The combined annual limit on all employer and employee contributions to a defined contribution plan is $70,000 for 2026, up from $69,000 in 2025. The compensation limit used in any contribution formula is $350,000. Both figures come from the IRS annual cost-of-living adjustment and apply across money purchase, 401(k), and profit-sharing plans aggregated at the participant level.
When a Money Purchase Plan Makes Sense for Your Company A money purchase plan fits when the employer wants a predictable retirement benefit formula and has stable cash flow that can support the mandatory contribution in any economic environment. It also fits when the plan is part of a collective bargaining agreement or needs to meet specific benefit goals that discretionary contributions can't guarantee. For most small and mid-sized employers comparing options today, a profit-sharing plan with a discretionary match delivers similar contribution capacity with more flexibility, especially when the goal is employee retention rather than a guaranteed pension-style benefit.
If you're deciding whether to keep, convert, or terminate an existing money purchase plan, work with an ERISA attorney and a third-party administrator. Plan terminations trigger vesting acceleration and require participant notices, IRS filings, and final Form 5500s. A conversion to a profit-sharing design can usually happen without a full termination, but it still requires a formal amendment and participant disclosures. For the bigger picture, map how retirement contributions fit into your total compensation strategy, and check the IRS plan definitions page for formal language on each plan type.
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