Generally qualified plans cannot discriminate in favor of highly compensated employees. However, disparity is permitted through “integration” with Social Security. As such, all eligible employees who participate in a plan are allocated a certain percentage of their eligible compensation, not to exceed $290,000 in 2020. Furthermore, all eligible employees who participate in the plan and whose compensation exceeds the Social Security Taxable Wage Base in effect for that year ($142,800 in 2020) are allocated an additional percentage not to exceed 5.7% of the difference between the Social Security Taxable Wage Base and their eligible compensation.
Compared with some of the other plan designs, social security integration doesn't quite have bang for the buck. But for employers that have small groups of highly compensated employees and more non-HCEs, it's a plan design that might work for them. Owners in our example could get in more funds in other plan options, like the 401(K), but not every owner is going to max out contributions. Next in the series, cross-tested plans, is another option that can target different classes of employees.
As you can see, the more options you have in plan design, the more complex things can get for business owners. Every situation is different, so it's important to work with a professional to help guide you in what would make the most sense for your company and employees.
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The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.