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Under this type of plan, employers make annual contributions to the plan, which
are allocated to individual accounts for eligible employees. These contributions
are based on a formula that's written into the plan - typically, a fixed percentage
of employee compensation.
Because employer plan contributions are a fixed annual obligation, employers lose
the flexibility they would have with a profit-sharing plan. In addition, a money
purchase plan may allow, or even require, employee contributions on top of the annual
employer contributions.
Employer Benefits
- Employers can claim a current income-tax deduction for the amount of their
annual contributions, within the tax law's limits
Employee Benefits
- Employees don't pay current taxes on plan contributions or earnings.
They are taxed only when distributions are made from the plan
- Employees are guaranteed a contribution every year
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