When it comes to retirement planning, there are plenty of options to choose from. One such option is the money purchase plan, which is a type of defined contribution plan that allows employees and employers to contribute to a retirement account.

To establish a money purchase plan, the adopting employer must sign an adoption agreement. This agreement outlines the terms and conditions of the plan, including the contribution limits, vesting schedules, and distribution rules. The agreement also lists the eligible employees who may participate in the plan.

Employers who adopt a money purchase plan must contribute a fixed percentage of each employee`s compensation to the plan each year. This contribution is tax-deductible for the employer and tax-deferred for the employee until they withdraw the funds at retirement.

One major benefit of a money purchase plan is that it provides a predictable retirement benefit for employees. The amount of the benefit is based on the contributions made by the employer and any investment earnings on those contributions. Since the employer is required to contribute a fixed percentage of each employee`s compensation, employees can have confidence in knowing how much they will receive in retirement.

Another advantage of a money purchase plan is that it allows for higher contribution limits than a traditional 401(k) plan. In 2021, the maximum contribution limit for a money purchase plan is $58,000, compared to $19,500 for a 401(k) plan. This higher contribution limit allows employees to save more for retirement, and also provides additional tax benefits for employers.

In addition to the adoption agreement, employers must also file annual reports with the IRS and the Department of Labor to ensure compliance with regulatory requirements. These reports include Form 5500 and a Summary Annual Report, which must be provided to plan participants.

Overall, a money purchase plan can be a valuable retirement planning tool for both employers and employees. By adopting an adoption agreement and making regular contributions, employers can provide a predictable retirement benefit to their employees while also enjoying tax benefits.