29. Permitted disparity — 0325 Publ 6088 (PDF)

Statement of Requirement: Code §§ 401(l), 401(a)(5); Reg. §§ 1.401(l)-2, 1.401-1(b)(1)(ii), 1.401(a)(26)-6(b)(7), 1.410(b)- 6(f); ~~Rev. Proc. 2017-41R~~ ev. Proc. 2023-37, 2023- 51 I.R.B. 1491, sec. ~~5.169~~ .03(1)

Profit-sharing plan:

(Note to reviewer: Pursuant to Code § 401(a)(27), employer contributions to a profit-sharing plan are not limited to an employer's current or accumulated profits; however, ~~if employer contributions are not so limited, t~~ he plan must designate whether it is a pension plan (such as a target benefit or money purchase plan), or a profit-sharing plan. The plan type must also be designated if the plan is a profit- sharing plan that contains a § 401(k) arrangement.)

Sample Plan Language:

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Subject to the overall permitted disparity limits, employer contributions for the plan year plus any forfeitures will be allocated to the account of each participant who either completes more than 500 hours of service during the plan year or who is employed on the last day of the plan year as follows:

(Note to reviewer: A Nonstandardized plan may, as an option, require a participant (a) to be employed on the last day of the plan year, and /or (b) to have completed up to 1,000 hours of service during the plan year to receive an allocation of the employer contribution.)

STEP ONE: Contributions and forfeitures will be allocated to each participant's account in the ratio that each participant's total compensation bears to all participants' total compensation, but not in excess of 3% of each participant's compensation.

(Note to reviewer: A plan that utilizes elapsed time in lieu of counting hours of service may substitute the completion of either 91 consecutive calendar days or 3 consecutive calendar months for 500 hours of service in the above sample language.)

STEP TWO: Any contributions and forfeitures remaining after the allocation in Step One will be allocated to each participant's account in the ratio that each participant's excess compensation for the plan year in excess of the integration level bears to the excess compensation of all participants, but not in excess of 3% of each participant's compensation. For purposes of this Step Two, in the case of any participant who has exceeded the cumulative permitted disparity limit described below, such participant's total compensation for the plan year will be taken into account.

STEP THREE: Any contributions and forfeitures remaining after the allocation in Step Two will be allocated to each participant's account in the ratio that the sum of each participant's total compensation and compensation in excess of the integration level bears to the sum of all participants’ total compensation and compensation in excess of the integration level, but not in excess of the profit- sharing maximum disparity rate. For purposes of this Step Three, in the case of any participant who has exceeded the cumulative permitted disparity limit described below, two times such participant's total compensation for the plan year will be taken into account.

STEP FOUR: Any remaining employer contributions or forfeitures will be allocated to each participant's account in the ratio that each participant's total compensation for the plan year bears to all participants' total compensation for that year.

The integration level shall be equal to the taxable wage base, or such lesser amount elected by the employer in the adoption agreement. The taxable wage base is the contribution and benefit base under section 230 of the Social Security Act at the beginning of the plan year.

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Overall permitted disparity limits

Annual overall permitted disparity limit: Notwithstanding the preceding paragraphs, for any plan year this plan benefits any participant who benefits under another qualified plan or simplified employee pension, as defined in § 408(k) of the Code, maintained by the employer that provides for permitted disparity (or imputes disparity), employer contributions and forfeitures will be allocated to the account of each participant who either completes more than 500 hours of service during the plan year or who is employed on the last day of the plan year in the ratio that such participant's total compensation bears to the total compensation of all participants.

Cumulative permitted disparity limit: The cumulative permitted disparity limit for a participant is 35 total cumulative permitted disparity years. Total cumulative permitted years means the number of years credited to the participant for allocation or accrual purposes under this plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the employer. For purposes of determining the participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the participant has not benefited under a defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the participant has no cumulative disparity limit.

Compensation shall mean compensation as defined in section _____ of the plan.

(Note to reviewer: The blank should be filled in with the plan section number which corresponds to LRM #62.)

The maximum profit-sharing disparity rate is equal to the lesser of:

(a) 2.7%

(b) the applicable percentage determined in accordance with the table below:

If the Integration Level

the applicable percentage is more than but not more than is: $0 X* 2.7%

X* of TWB 80% of TWB 1.3%

80% of TWB Y** 2.4%

*X = the greater of $10,000 or 20 percent of the taxable wage base

**Y = any amount more than 80% of the taxable wage base but less than 100% of the taxable wage base.

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If the integration level used is equal to the taxable wage base, the applicable percentage is 2.7%.

(Note to reviewer: The taxable wage base for 2023 is $160,200.)

(Note to reviewer: The above allocation formula incorporates a 3% top-heavy minimum contribution for all years. However, a plan may provide that steps 1 and 2 above apply only in years in which the plan is top-heavy.)

Sample Adoption Agreement Language:

( ) The employer’s profit-sharing allocation is integrated within the meaning of Code section 401(l). The integration level is equal to:

( ) Taxable wage base

( ) $______ (a dollar amount less than the taxable wage base)

( ) _____ % of taxable wage base (not to exceed 100%)

Money purchase plan

Sample Adoption Agreement Language:

Subject to the overall permitted disparity limits, the employer will contribute for each participant who either completes more than 500 hours of service during the plan year or is employed on the last day of the plan year an amount equal to _____ % (base contribution percentage, not less than 3) of each participant's compensation (as defined in section _____ of the plan) for the plan year, up to the integration level plus _____ % (excess contribution percentage, not less than 3% and not to exceed the base contribution percentage by more than the lesser of: (1) the base contribution percentage, or (2) the money purchase maximum disparity rate) of such participant's compensation in excess of the integration level. However, in the case of any participant who has exceeded the cumulative permitted disparity limit, the employer will contribute for each participant who either completes more than 500 hours of service during the plan year or is employed on the last day of the plan year an amount equal to the excess contribution percentage multiplied by the participant's total compensation.

(Note to reviewer: The above allocation formula incorporates a 3% top-heavy minimum contribution. The second blank should be filled in with the plan section number corresponding to LRM #62.)

Overall permitted disparity limit:

Annual overall permitted disparity limit: Notwithstanding the preceding paragraph, for any plan year this plan benefits any participant who benefits under another qualified plan

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or simplified employee pension, as defined in § 408(k) of the Code, maintained by the employer that provides for permitted disparity (or imputes disparity), the employer will contribute for each participant who either completes more than 500 hours of service during the plan year or is employed on the last day of the plan year an amount equal to the excess contribution percentage multiplied by the participant's total compensation.

The integration level shall be equal to the taxable wage base, or such lesser amount elected by the employer below. The taxable wage base is the contribution and benefit base in effect under section 230 of the Social Security Act at the beginning of the plan year.

The integration level is equal to:

( ) Taxable wage base

( ) $ _____ (a dollar amount less than the taxable wage base)

( ) _____ % of taxable wage base (not to exceed 100%)

The maximum money purchase disparity rate is equal to the lesser of:

(a) 5.7%

(b) the applicable percentage determined in accordance with the table below.

(i) If the integration level:

the applicable is more than but not more than percentage is:

$0 X* 5.7%

X* of TWB 80% of TWB 4.3%

80% of TWB Y** 5.4%

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*X = the greater of $10,000 or 20 percent of the taxable wage base

**Y = any amount more than 80% of the taxable wage base but less than 100% of the taxable wage base.

If the integration level is equal to taxable wage base the applicable percentage is 5.7%.