What does the term "permitted disparity" relate to in retirement plans?

The term "permitted disparity" specifically relates to social security integration within retirement plans. This concept allows for a greater contribution or benefit rate for higher-paid employees compared to lower-paid employees, which is permissible under guidelines set forth by the Internal Revenue Code.

The rationale behind permitted disparity is to align retirement plan benefits more closely with the benefits that higher earners receive from Social Security, while still providing equitable benefits to all employees. By allowing for this disparity, plan sponsors can create benefits that reflect the differing levels of social security benefits that employees are eligible to receive, encouraging higher contributions for those whose benefits may be less advantageous from Social Security.

Understanding this concept is vital for managing retirement plans effectively, as it helps ensure compliance with regulatory requirements while also meeting the financial and strategic goals of the sponsored plan. This knowledge aids in structuring contributions in a way that balances the interests of both the employer and their employees.