Which basic provision of a money purchase pension plan is correct?

Which basic provision of a money purchase pension plan is correct?

• A. A money purchase plan is not subject to the minimum funding standard.
• B. The employer may deduct contributions up to a maximum of 25% of covered payroll.
• C. Employer contributions are allocated based on relative compensation.
• D. Forfeitures from nonvested participants must reduce employer contributions.

Answer: (C)

In a money purchase pension plan, the correct provision is that employer contributions are allocated based on relative compensation. This means that contributions made by the employer to the plan are divided among employees in proportion to their individual earnings. Each participant’s account receives an allocation based on their share of the total compensation of all eligible employees, ensuring that those who earn more receive a larger portion of the contributions. This allocation method reflects the fundamental design of a money purchase plan, where contributions are predetermined and not dependent on the profitability of the business. Each participant accumulates benefits in an account that grows over time, with the final benefit at retirement being based both on contributions and the investment performance of those contributions. This characteristic aligns with the principles of defined contribution plans, where contributions are fixed rather than determined by the employer's financial performance. The allocation based on compensation ensures equitable treatment and is a key component of the plan's structure, supporting the goal of providing retirement benefits that are proportional to employee earnings. The other choices don't align with the provisions of a money purchase pension plan as closely as this one does. For example, a money purchase plan does have minimum funding standards, and employer contribution limits typically involve a different calculation. Also, the treatment of forfeitures has specific rules which may

In a money purchase pension plan, the correct provision is that employer contributions are allocated based on relative compensation. This means that contributions made by the employer to the plan are divided among employees in proportion to their individual earnings. Each participant’s account receives an allocation based on their share of the total compensation of all eligible employees, ensuring that those who earn more receive a larger portion of the contributions.

This allocation method reflects the fundamental design of a money purchase plan, where contributions are predetermined and not dependent on the profitability of the business. Each participant accumulates benefits in an account that grows over time, with the final benefit at retirement being based both on contributions and the investment performance of those contributions.

This characteristic aligns with the principles of defined contribution plans, where contributions are fixed rather than determined by the employer's financial performance. The allocation based on compensation ensures equitable treatment and is a key component of the plan's structure, supporting the goal of providing retirement benefits that are proportional to employee earnings.

The other choices don't align with the provisions of a money purchase pension plan as closely as this one does. For example, a money purchase plan does have minimum funding standards, and employer contribution limits typically involve a different calculation. Also, the treatment of forfeitures has specific rules which may