Which statement best describes a Money Purchase Plan?

Which statement best describes a Money Purchase Plan?

• A. Defined contribution plan that uses a fixed percentage of earnings to defer compensation
• B. Defined benefit plan with fixed payout
• C. Contributions can vary year to year
• D. Only for small businesses with variable earnings

Answer: (A)

Money Purchase Plan is a defined contribution plan where the employer contributes a fixed percentage of each employee’s compensation to their account every year. The important part is that the contribution level is defined as a set percentage, not a guaranteed benefit amount—the retirement payout depends on how those contributions perform through investments. That’s why this option best describes a money purchase plan. It isn’t a defined benefit plan with a fixed payout, so that alternative doesn’t fit. The contributions in a money purchase plan are not meant to vary year to year because the plan specifies the fixed percentage to contribute. And it isn’t restricted to small businesses with variable earnings; plans like this can be established by a range of employers.

Money Purchase Plan is a defined contribution plan where the employer contributes a fixed percentage of each employee’s compensation to their account every year. The important part is that the contribution level is defined as a set percentage, not a guaranteed benefit amount—the retirement payout depends on how those contributions perform through investments. That’s why this option best describes a money purchase plan.

It isn’t a defined benefit plan with a fixed payout, so that alternative doesn’t fit. The contributions in a money purchase plan are not meant to vary year to year because the plan specifies the fixed percentage to contribute. And it isn’t restricted to small businesses with variable earnings; plans like this can be established by a range of employers.