Contributions are based on a fixed percentage of wages and are mandatory. This type of plan is usually used by businesses desiring greater tax deductions than a profit sharing plan. These businesses usially have stable revenues and are able to commit to a fixed, madatory contribution. This is a true pension plan. A pre-specified amount of income is gauranteed every participant upon retirement.
Contributions are greatly skewed towards the older and highest paid participants.
This type of plan is generally used by businesses with older principals or owners desiring contributions substantially higher than a money purchace plan. Such businesses must be able to make substantial contributions on a regular basis. This plan combines the qualitied of both the money purchace and definied benefit plans. Like the money purchace, contributions are based on a precentage of wages. However, like the defined benefit plan, contributions are skewed towards the older and higher paid participants.