Can someone explain a Money Purchase Pension Plan?

[catccc]

I'm considering an opportunity outside of my current company, and the have a money purchase pension plan. (In addition to a 401K). They contribute 10% each year, and then after 3 years of service, you are "fully vested in the benefit earned in the plan."

I'm not really familiar with this, all my previous employers have only had 401Ks.

From my understanding, the contribution is required by the employer and is not tied to company/employee performance. How is it invested?

If anyone is familiar with this type of plan, can you give me some basics? How is it treated from a tax perspective?

 

[rodi]

My understanding is it's a lump sum benefit plan, rather than a defined benefit plan. Employer puts in money - and is in charge of the investments. (You have no control)... over time the lump gets bigger. When you retire or change jobs, if you're vested, you can roll that money out into an IRA.

My megacorp replaced their defined benefit plan with this kind of "pension". It's employer provided money - so it's a good deal for the employee - but a defined benefit plan (now extinct) is better for the employee (at least that was the case at my megacorp.)

But any kind of pension, provided by an employer, is better than none.

 

[Big_Hitter]

MPPs also have to offer a QJSA annuity option

this (and other things) should be spelled out in the MPP's SPD

 

[steelyman]

I actually have one and never understood it. I asked at a meeting with the retirement people and the counselor said "it's like a defined benefit plan wrapped around a defined contribution plan". So, the more you put in the more you get out. All I can report is what she said, so I guess one has to do their own research.

My plan is fully Federally taxable as ordinary income.

 

[Big_Hitter]

let me see if I can find a better explanation on MPPPs

in brief, they are an employer-provided defined contribution plan that must offer an qualified joint and survivor annuity option on termination (unlike profit sharing or 401k plans)

 

[steelyman]

let me see if I can find a better explanation on MPPPs

in brief, they are an employer-provided defined contribution plan that must offer an qualified joint and survivor annuity option on termination (unlike profit sharing or 401k plans)

I think this is correct (at least in the case of my plan). I get a monthly annuity payment that allows me to post on ER.org. When I quit, I received a refund of the survivor's contribution (but you don't have to do that).

 

[Big_Hitter]

here you go

http://leg.mt.gov/content/committees/interim/2007_2008/st_admin_vet_affairs/staff_reports/04148A%20-%20MONEY%20PURCHASE%20PLANS.pdf

 

[pb4uski]

We had something that seems similar but I never heard it referred to as a money purchase plan.

Ours was a non-contributory DC plan that the employer contributed x% of earnings into. The percentage increased the higher that you were in the chain and peaked at 7% IIRC. Then I had to chose what it was invested in. The investment choices were the same as our 401k plan and i could move the money between investments as I wanted to. When I left the firm I had choice of leaving it, rollover to my IRA or taking it in the form of an annuity. The annuity rates were favorable so I have left it invested and plan to let it grow and convert it into an annuity later.

 

[catccc]

Thanks for the input. Big_hitter, the link doesn't seem to be working.

If it is taxed as ordinary income, do you mean when you receive benefits? I have a hard time seeing that this is taxed if you haven't gotten anything yet (if the company has only made contributions to the plan on my behalf, and I'm not yet vested.)

 

[pb4uski]

FWIW, mine is just like a 401k, any benefits that I receive will be taxable as ordinary income in the year I receive them. YMMV.

 

[steelyman]

If it is taxed as ordinary income, do you mean when you receive benefits? I have a hard time seeing that this is taxed if you haven't gotten anything yet (if the company has only made contributions to the plan on my behalf, and I'm not yet vested.)

Yes, that's what I mean. 2012 was the first year I received anything so the tax return I filed in April included 1099-R forms (never saw those before).

 

[catccc]

Yes, that's what I mean. 2012 was the first year I received anything so the tax return I filed in April included 1099-R forms (never saw those before).

Ah, I see in your signature that you retired in Oct-12. Dreamy. Congrats!

So as the contributions were made, no tax impact, then?

 

[steelyman]

Ah, I see in your signature that you retired in Oct-12. Dreamy. Congrats!

Thank you!

 

[steelyman]

So as the contributions were made, no tax impact, then?

Correct. They did, however, deduct a percentage of everyone's salary each pay period which went to the pension plan.

 

[Big_Hitter]

Thanks for the input. Big_hitter, the link doesn't seem to be working.

weird, works for me - try compatibility mode?

 

[SumDay]

Money-Purchase Pension Plan Definition | Investopedia

 

[steelyman]

SumDay - I think most people can use Google. What's nice is when a member takes the time to filter relevant excerpts and posts that.

 

[catccc]

Sum Day, thanks, I actually did read that investopedia bit before I posted over here, because I didn't think it really explained it enough for me.

So this pension is 100% company funded, but it is a defined contribution plan.

Steelyman, I'm going to guess that the portion that was deducted from your paycheck for the pension was not taxable, like a traditional 401K contribution?

So would it be reasonable to included the company contributions as part of your retirement stash once you are vested?

 

[pb4uski]

A traditional (pre-tax) 401k contribution is taxable when withdrawn from the 401k since it reduces taxable earnings when the contribution is made.

If the contributions steelyman made to his plan did not reduce his taxable earnings when the contributions were made (ie; were after-tax contributions) then typically a portion of each distribution would be taxable and a portion would not be (similar to an annuity benefit payment).

My plan was similar to yours, 100% company funded, so when I take withdrawals will be 100% taxable, like my (pre-tax) 401k withdrawals.

 

[Texas Proud]

Sum Day, thanks, I actually did read that investopedia bit before I posted over here, because I didn't think it really explained it enough for me.

So this pension is 100% company funded, but it is a defined contribution plan.

Steelyman, I'm going to guess that the portion that was deducted from your paycheck for the pension was not taxable, like a traditional 401K contribution?

So would it be reasonable to included the company contributions as part of your retirement stash once you are vested?

It might or might not be a defined contribution plan.... my old mega's plan is a defined benefit plan.... I did not know until someone on this board suggested it might be and I actually looked... they converted the old DB plan somehow where it looks like a DC plan...

 

[catccc]

I think Steelyman said that his benefits are taxed as ordinary income, so he must not have gotten taxed when they were taken from him, right? You should only get taxed once.

Unless you live in PA when you contribute and then move to a state that does it the "regular" way. (PA does not let you reduce taxable income with trad 401K contributions... but they do not tax you on withdrawals when you retire.) But that's a complaint for another thread.

 

[pb4uski]

I think Steelyman said that his benefits are taxed as ordinary income, so he must not have gotten taxed when they were taken from him, right? You should only get taxed once. ...

Yes, you should only get taxed once - so if the contributions were pre-tax money (reduced your taxable earnings) then all distributions are included in taxable income but if the contributions were after-tax money then I think only a portion of the distributions are taxable since a portion of the distribution is a return of your already taxed contribution and the remainder is growth that has never been taxed (similar to annuity benefits from an annuity purchase with after-tax funds being only partially taxable income).

 

[steelyman]

Yes, our contributions to the pension system (8% of salary) were taken off the top and not taxed. Now that I'm receiving the annuity, it is 100% taxable.