Integration, also known as Permitted Disparity, is used to skew contributions or benefits in favor of the more highly compensated employees. The rules described here are from IRC Code Section 401(l).

The rationalization for permitted disparity has its roots in the Social Security system. Under Social Security, an employer and employee pay 7.15% of compensation, up to the Taxable Wage Base, into the system. This provides for government retirement and medical benefits.

For an employee making less than $61,200 (the 1995 limit), the employer's contribution to the employee's Social Security benefit is based on all his pay. If you make, say $122,400, only half of your compensation is being considered for Social Security purposes. Or, your employer makes Social Security contributions (pays Social Security taxes) on only half of your pay, while he pays taxes on 100% of other employee's pay.

To a limited extent, a private retirement plan is allowed to make up some of this disparity. An example may help illustrate the method:

             Total    Excess    Contri    % of 
             Salary   Salary    bution   Salary
Owner        150000    88800     13612    9.07%
Manager       75000    13800      5062    6.75%
Employee1     45000        0      2565    5.70%
Employee2     35000        0      1995    5.70%
Employee3     30000        0      1710    5.70%

Here, the contribution formula is 5.7% of all salary (the Base Percentage), plus an additional 5.7% of salary in excess of the integration level (the Excess Percentage). The integration level is the Taxable Wage Base (TWB), the amount Social Security taxes are based on ($61,200 for 1995 , $87,000 for 2003) .

A few rules must be kept in mind. First, the Base Percentage must be equal or greater than the Excess Percentage.

Next, the maximum Excess Percentage is limited by the Integration Level chosen. The table below summarizes permissible Excess Percentages:

                    Integration Level                     

                             Example with TWB     Maximum 
   Integration Level           at $ 87,000        Excess %
   $0 to 20% of TWB         $     0 to $17,400      5.7%   
 Over 20% of TWB to 80%     $17,401 to $69,600      4.3%   
 Over 80%, less than 100%   $69,601 to $86,999      5.4%   
100% of Taxable Wage Base         $87,000           5.7%   

In our experience, a level of 81% of taxable wage base and a 5.4% Excess Percentage usually works best.

A list of all Taxable Wage Bases should be here. (Use your browser's Back button to return)

Defined Benefit Plans may also be integrated. The benefit formula is expressed as x% of all pay, plus x% over Covered Compensation.

The rules relating to Defined Benefit Plan integration are too numerous to be covered here.

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