Which Plan should I integrate with Social Security

[Guest Don J. Smith]

I have a small employer with just a few employees. He wants to provide the maximum benefit to himself utilizing a Profit Sharing 401K and a Money Purchase Pension. (Does not want a Cross-tested Plan).

Which plan should he integrate with Social Security?

[david rigby]

Integration (now called "permitted disparity" in the Internal Revenue Code) is a method of recognizing that the Social Security program does not provide equal benefits as a percent of pay. For example, a worker who earns exactly the social security wage base for his/her entire career will earn a certain SS benefit. But another worker who earns exactly twice this amount will get exactly the same SS benefit, which is obviously much less as a percent of pay.

Now imagine that the ER provides a benefit that is exactly 30% of pay to each retiree. The *total* benefit provided by SS plus the employer plan is no longer proportional when viewed as a percent of pay. The tax laws permit a recognition of this by allowing the employer plan to provide a higher percent benefit above a certain level, thus "integrating" with social security.

The IRS regs define the method of doing a "safe harbor" integration, such that if the rules are followed, then the plan does not have to prove it is non-discriminatory. Or saying that a different way, the use of SS integration is a method to include a benefit that might otherwise be viewed as discriminatory.

The above discussion is a defined benefit approach. The defined contribution approach is that the ER contribution in the form of SS taxes decreases (as a percent of pay) as pay increases beyond the SS wage base. So, by making a higher percentage contribution for pay above that wage base (that is, an employer contribution to an employer plan), the employer is "integrating" the contribution with social security. Again, the purpose is to view the total contribution as a percent of pay.

If you have more questions, please post.

[This message has been edited by pax (edited 01-14-2000).]

[Guest jaseed]

I'll bite.

What is/are the employer's ojective(s)? Do they really want two plans? Are the owners twenty-something?

The safe harbor 401(k) profit sharing plan is a possibility (show them $30,000 in one plan and simply determine the integration level by getting the base/excess to work for the least contribution cost), other possibilities abound. Which one to integrate is an overall plan design decision. Also, unless the ages/groups simply do not work, I would definitely throw a non-safe harbor allocation in the plan design comparison. Some ideas, good luck.