IRS Publication 4964 – IRS Forms, Instructions, Pubs 2026 – In the realm of employee benefit plans, ensuring compliance with IRS regulations is crucial for both employers and plan administrators. One key aspect is permitted disparity under Section 401(l) of the Internal Revenue Code (IRC), which allows for variations in contribution or benefit rates that favor higher-compensated employees while maintaining nondiscrimination. IRS Publication 4964, titled “Employee Benefit Plans: Explanation No. 5B Permitted Disparity,” serves as a vital resource for understanding these rules. This article breaks down the publication’s content, including definitions, requirements, and practical applications, to help you navigate retirement plan design effectively.
Published in its revised form in June 2021, this document includes worksheets and checksheets to identify issues in plan designs that incorporate permitted disparity. It applies to plans submitted under the 2020 Required Amendments List and emphasizes that the IRS reviews do not cover all nondiscrimination aspects but focus on safe harbor compliance.
What Is Permitted Disparity in Employee Benefit Plans?
Permitted disparity, often referred to as Social Security integration, allows qualified retirement plans to provide higher contribution or benefit rates for compensation above a certain threshold—typically tied to the Social Security Taxable Wage Base (TWB). This compensates for the fact that Social Security taxes are only applied up to the TWB, meaning employers pay a proportionally higher tax rate on lower earners’ wages. Under IRC Section 401(l), plans can integrate benefits or contributions with Social Security without violating nondiscrimination rules, provided they meet specific criteria.
The publication outlines how disparity works in defined contribution (DC) plans and defined benefit (DB) plans, including target benefit plans. It uses Form 9639 (Worksheet 5B) and Form 9637 (Deficiency Checksheet 5B) as tools to evaluate compliance. A “Yes” on the worksheet generally indicates compliance, while a “No” flags potential issues.
Key Concepts
- Integration Level: The compensation threshold below which lower rates apply. It must be uniform and not exceed the TWB.
- Base and Excess Percentages: In DC plans, the base contribution percentage applies to compensation at or below the integration level, while the excess applies above it.
- Maximum Excess Allowance: Limits how much the excess percentage can exceed the base, typically capped at 5.7% or the OASDI tax rate.
- Cumulative Disparity Limit: Ensures long-term fairness, with a cap at 35 years for post-1994 plan years.
Permitted Disparity in Defined Contribution Plans
For DC plans (excluding target benefit plans) that use a design-based safe harbor and incorporate disparity, the publication details strict uniformity requirements.
Requirements
- Uniform Integration Level: Must be a fixed dollar amount ≤ TWB for all participants. If lower than TWB, the maximum disparity reduces (e.g., 4.3% for levels between 20% and 80% of TWB).
- Uniform Percentages: Base and excess contribution percentages must be the same for all employees. For those at the cumulative limit, allocate at the excess rate only.
- Maximum Disparity: The excess percentage can’t exceed the base by more than the lesser of the base or 5.7% (or adjusted for lower integration levels).
- Overall Limits: Plans must prevent exceeding annual and cumulative disparity fractions. No other plan can impute disparity for covered employees, and adjustments are required if multiple 401(l) plans cover the same workers.
If the integration level is below TWB, use the following reduction table for the maximum permitted disparity (when the factor is 5.7%):
| Integration Level Range | Reduced Factor |
|---|---|
| > Greater of $10,000 or 20% of TWB, ≤ 80% of TWB | 4.3% |
| > 80% of TWB, < 100% of TWB | 5.4% |
Non-FICA employees can receive allocations at the excess rate on all compensation.
Permitted Disparity in Defined Benefit and Target Benefit Plans
DB plans and safe harbor target benefit plans follow similar but distinct rules. Target benefit plans generally mirror DB disparity requirements.
Integration/Offset Levels
The integration level (excess plans) or offset level (offset plans) must be one of:
- Each participant’s covered compensation (average TWB over 35 years ending at Social Security retirement age).
- A uniform percentage of covered compensation (≤ TWB or final average compensation).
- A single dollar amount ≤ greater of $10,000 or 50% of covered compensation for someone attaining retirement age that year.
- A higher single dollar amount (with reductions to the 0.75% factor).
Covered compensation tables are updated annually via revenue rulings, like Rev. Rul. 2025-2 for 2025 plan years.
Uniformity and Maximum Allowance
- Benefit Percentages: Base/excess or gross/offset percentages must be uniform for participants with the same service years.
- Maximum Excess/Offset Allowance: In excess plans, excess benefits can’t exceed base by more than 0.75% (adjusted for early retirement, integration level, etc.). For offset plans, the offset is limited to 50% of the benefit based on final average compensation.
- Adjustments: Reduce the 0.75% factor for retirement ages >65, higher integration levels, or to ensure cumulative limits (e.g., no more than 0.75% annual disparity over career).
Exceptions include fractional accrual rules, PIA offset plans with a 401(l) overlay, and provisions for employees at cumulative limits.
Annual and Cumulative Limits
Plans must adjust benefits if disparity fractions exceed 1 annually or 35 cumulatively. For aggregated DB/DC plans, combined disparity is tested.
Examples of Permitted Disparity
DC Plan Example
Suppose a DC plan integrates at 100% of TWB ($168,600 in 2026). Base contribution: 5%. Excess: 10.7% (base + 5.7%). For an employee earning $200,000:
- Base: 5% of $168,600 = $8,430
- Excess: 10.7% of $31,400 = $3,359.80
- Total: $11,789.80 (5.89% overall)
If integration is at 50% TWB, adjust maximum disparity downward.
DB Plan Example
In an excess DB plan, base benefit: 1% of compensation ≤ integration level. Excess: 1.75% (1% + 0.75%). Over 30 years, this provides integrated benefits without discrimination.
For offset plans: Gross benefit 2%, offset 0.75% of final average compensation ≤ offset level.
Compliance and Common Pitfalls
Using Worksheet 5B, check for uniform levels, percentages, and limits. Common issues include exceeding disparity caps or failing to adjust for multiple plans. Plans must specify adjustment methods to stay within limits.
For SEP plans, nonuniformity is allowed via permitted disparity under IRC 408(k)(3)(D), but compensation caps apply ($345,000 in 2024).
Recent Updates and Considerations
As of 2026, the principles in Publication 4964 remain unchanged, but TWB and covered compensation adjust annually. For 2025, covered compensation is based on averages without future indexing assumptions. Cross-tested plans must meet “new comparability” rules for post-2001 years, including minimum allocation gateways.
Employers should consult IRS checklists and consider professional advice to ensure plans qualify. Technical changes may arise from future regulations.
Why Permitted Disparity Matters for Your Business
Incorporating permitted disparity can optimize retirement benefits for key employees while controlling costs. It levels the playing field against Social Security disparities, potentially increasing contributions for high earners by up to 5.7% on excess pay. However, improper implementation risks plan disqualification.
For full details, download Publication 4964 from IRS.gov. If designing or amending a plan, review with a tax professional to align with current rules.
This guide demystifies IRS Publication 4964, empowering you to build compliant, effective employee benefit plans. Stay informed on IRS updates to maintain tax advantages and employee satisfaction.