What is the maximum disparity percentage in a design-based allocation method using permitted disparity at an integration level of 100% of TWB?

In a design-based allocation method using permitted disparity, the maximum disparity percentage is determined by the integration level with Social Security benefits. The integration level is typically set at a percentage of the taxable wage base (TWB). When the integration level is set at 100% of the TWB, the permitted disparity allows for a specific maximum percentage of disparity in contributions or benefits, based on the regulatory framework.

For contributions to be structured under permitted disparity, the maximum disparity in benefit accruals or contributions must not exceed 5.7% when using the design-based allocation method at this integration level. This percentage reflects the maximum permissible difference in how higher-paid employees can be treated compared to lower-paid employees while still adhering to nondiscrimination rules.

The figure of 5.7% is grounded in regulations that aim to ensure that retirement plans provide equitable benefits to all participants, while correctly reflecting the increased accumulation potential for higher earners. This is particularly relevant in keeping plans compliant with IRS guidelines and ensuring that they do not disproportionately favor highly compensated employees in comparison to their lower-paid counterparts.