March 6, 2009

Social security integration (Permitted disparity)

Your Guide

Definition

Method of computing and allocating nonelective contributions under an employer sponsored plan, where the allocation method results in participants with compensation above the integration level receiving a higher percentage of contribution .

When computing social security integration, the taxable wage base is used to determine the allocation of contributions.

Referring Cite

  • IRC § 401(l)
  • Treas Reg § 1.401(l)-1 Permitted disparity in employer-provided contributions or benefits.
  • Treas Reg § 1.401(l)-2 Permitted disparity for defined contribution plans.
  • Treas Reg § 1.401(l)-3 Permitted disparity for defined benefit plans.
  • Treas Reg § 1.401(l)-5 Overall permitted disparity limits
  • Notice 89-70

Additional Helpful Information

  • Permitted disparity cannot be used for SIMPLE IRAs

Written By

Retirement Dictionary Staff

Frequently Asked Questions Regarding

Answer

Yes. As provided under http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000404—-000-.html IRC. §404(h)(1)(C), if an employer contributes an amount in excess of the 25% (of “net earnings from self-employment”) deductible limit, the amount is deductible in succeeding tax years. The amount will also be subject to the 25% limit for those years. For this purpose, a SEP IRA is treated as a https://www.retirementdictionary.com/definitions/qualifiedretirementplan qualified plan –as provided under http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004972—-000-.html IRC. §4972- and the excess amount is therefore subject to the 10% annual penalty tax on nondeductible excess contribution (Cite http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00004972—-000-.html IRC. §4972(d)(1)(A)(iii)).

The 10% penalty tax must be reported on https://www.retirementdictionary.com/definitions/5330-irs-form-5330 IRS Form 5330.

Note: The SEP IRA custodian will report the SEP contribution on IRS Form 5498 for the year they received the amount. The carry-forward occurs on the books and records- including tax return- of the employer. No adjustment is done by the SEP IRA custodian.

It is not necessary to establish a separate IRA for nondeductible contributions, as all of the individual’s traditional, SEP and SIMPLE IRAs are treated as one IRA for purpose of determining the taxable amount of any distribution from either of those IRAs. For instance, assume he has three IRAs, one with $2,000 nondeductible contribution, another with $4,000 deductible contributions, and the third with $4,000 SEP IRA contribution. If he takes a distribution of $2,000, the distribution will be prorated to include 1/5 nontaxable amount and 4/5 taxable amount, regardless of which of the traditional, SEP or SIMPLE IRA the distribution is taken from.

The individual must file IRS Form 8606 to keep track of the nontaxable (nondeductible) amounts. Form 8606 must also be filed for any year that the IRA owner takes a distribution from any of his traditional, SEP or SIMPLE IRA, so as to determine the taxable and nontaxable portion of the distribution.

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