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    Permitted Disparity

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    The Code's "integration" or "permitted disparity" rules permit an employer's allocation or benefit accrual formula to provide a lower rate for a participant's compensation at or in excess of Social Security's maximum taxable wage base than for compensation below this maximum taxable wage base. Why? What does this mean for the employer? For the employee?

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    The permitted disparity rules allow what can be thought of as a sliding scale for percentages on contributions, which is generally based on a defined benefit plan once salary hits a certain amount. Under a defined benefit plan, the employer determines the employee's future benefit based on conditions today, and the main condition used is typically the employee's salary. The problem is that when we have higher paid employees that exceed the social security wage limit, the employer typically reduces the contributions to the defined ...

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    This solution discusses permitted disparity. A comprehensive discussion is provided.