Permitted disparity is a method of allocating a higher percentage of compensation to employees with compensation beyond a certain level, while still following IRS non-discrimination regulations. This is allowed because employers must pay a higher percentage of compensation for employees with lower compensation than those with higher levels of pay due to Social Security.
Employers pay a certain percentage (5.7%) of an employee’s pay to Social Security, up to the Social Security Taxable Wage Base (SSTWB), which is $147,000 for 2022[1]. Thus, they pay the same Social Security contribution for an employee that earns $147,000 as they do for an employee that earns $250,000.
Permitted disparity makes up for this discrepancy by allowing the employer to allocate a higher percentage of pay to employees whose compensation is above the SSTWB, or above a certain percentage of it.
Pinnacle Plan Design is equipped to incorporate permitted disparity into your qualified retirement plan, or suggest other options that would be more beneficial for your firm.
[1] http://www.ssa.gov/oact/cola/cbb.html
Pinnacle Plan Design is a third-party administrator (TPA) for employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting for 401(k)/profit-sharing plans, defined benefit plans, cash balance plans, and 403(b) plans. Pinnacle Plan Design proudly serves businesses nationwide.