401k Permitted Disparity

[Nashville]

Have just seen an announcement to employees from their 401k carrier.

It announces what it calls "Permitted Disparity." I hope I'm being fair in my understanding, but if so, this means highly paid employees are due more than their pro-ratum share of plan benefits. The announcement continues by explaining that this high-end biased distortment is now permitted because highly-paid employees are "deprived of their employers' share of FICA when exceeding the FICA limit."

(By the way, I would enjoy this ballyhooed "deprivation" any day of the week simply by not having to pay 6.2% of my paycheck for the employees share).

The compensation threshhold for this particular plan is $97,500. Compensation in excess of this launches this so-called "permitted disparity."

If I were a lesser-compensated employee, I would withdraw from such a plan in a heartbeat. AM I GOING NUTS HERE?? If I have misunderstood something or unfairly portrayed this feature, someone please correct me! Veritas, you out there??

[JON]

Integrated with social security has always been there

Usually requires 3% to all first and then in additional can be allocated to those above the social security limit and the balance is according to eligible compensation. When you total all of the contributions up the % disperity has to be within limits.

This only has to do with EMPLOYER contributions - why would anybody withdraw???

[taxxcpa]

Employer contribution

The employer contribution is a benefit of sorts. It is only a benefit on salaries up to the SS max, so a higher-paid employee is "deprived" of an employer contribution. Of course, he is also deprived of having to pay his share of the SS on the excess over the max.

Another interesting aspect, is that if you work two jobs and made the max on each, both employers would have to pay up to the max and would get no refund while the employee would get the refund.

One way of looking at it is the way the company you describe is looking at it--they are just giving the higher-paid employee the "matching contribution" that they don't have to make to the SSA.

Is it fair? It all depends on how you look at it. It would be fair if it benefited me, but would be unfair if it only benefited you.

[Burke]

If the maximum cap on FICA contributions were removed for all employees (as has happened with Medicare), while retaining the matching contribution cap for employers, would that be a politically acceptable method of increasing revenue to SSA system without penalizing small business employers? And would it raise any significant amt of revenue?