The Future of Money Purchase Pension Plans

 

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) dealt the Money Purchase Pension Plan a severe blow.  The annual deductibility limit for the Profit Sharing Plan has been increased from 15% to 25% of compensation, therefore making it equivalent to the contribution limit on a Money Purchase Plan.  When plan sponsors consider the inflexibility of the Money Purchase Pension Plan’s contribution and distribution requirements relative to the Profit Sharing Plan, they may elect to terminate the Money Purchase Plan, merge it with an existing Profit Sharing or 401(k) Plan, or amend it into a new Profit Sharing or 401(k) Plan. 

 

If the plan sponsor elects to terminate the Money Purchase Plan, the plan documentation must be updated for GUST and EGTRRA prior to filing a final IRS Form 5500.  Upon termination, all plan assets become fully vested and the participants may elect to receive a distribution.  In the event that the participant rolls over his or her assets to another tax-qualified retirement account, the assets are no longer subject to the distribution restrictions that apply to Money Purchase Pension Plan assets.

 

Amendment or merger of a Money Purchase Plan into a Profit Sharing or 401(k) Plan is slightly more involved.  Participants are not permitted to take distributions, and the IRS has recently ruled that participants do not have to be fully vested upon merger or amendment.  The Money Purchase Plan can be amended for GUST and EGTRRA prior to merging into another plan, or the successor plan can be amended alone.

 

A challenging aspect of any Money Purchase Pension Plan has been complying with the restrictions applicable to distributions.  Even after merging a Money Purchase plan into a new or existing Profit Sharing or 401(k) Plan, the assets attributable to the original Money Purchase must be separately accounted for, and must be available to distribute under the qualified joint and survivor annuity rules, and may not be distributed under hardship circumstances or while “in-service” until the participant reaches Normal Retirement Age.   In light of these additional administrative requirements, many employers (particularly small businesses) will elect to terminate the Money Purchase rather than merge it into another plan.

 

Participants must be provided with an ERISA 204(h) notice prior to amending or terminating the Money Purchase Pension Plan, and a final IRS Form 5500 must be filed for the plan once all assets have been distributed or transferred to the receiving plan.  Plan sponsors should contact their plan administrator and/or tax advisor for further information.