What Is a Permitted Disparity Profit Sharing Plan?
Explore a profit sharing design that allocates larger employer contributions to compensation above a set level, within a structured compliance framework.
A permitted disparity profit sharing plan allows employers to contribute a higher percentage of compensation for their higher-paid employees. This approach is often used by business owners and key executives to maximize their retirement savings while providing benefits to their workforce. The structure integrates the company’s retirement plan contributions with the Social Security taxes the employer pays.
This plan design recognizes that employers contribute to Social Security only up to an annual wage limit. A permitted disparity formula allows the company to contribute more to the retirement accounts of employees whose earnings exceed that limit. This method directs a larger portion of the profit-sharing contribution to higher earners without violating nondiscrimination rules.
Core Concepts of Permitted Disparity
The ‘integration level’ is a specific compensation threshold that separates the two tiers of the contribution formula. This level is often set at the Social Security Taxable Wage Base (SSTWB) for the year, which for 2025 is $176,100. Compensation up to this amount receives one rate of contribution, while compensation above it receives a higher rate.
The plan categorizes employees into two groups: Highly Compensated Employees (HCEs) and Non-Highly Compensated Employees (NHCEs). An HCE is defined by the IRS based on specific ownership and compensation thresholds. For the 2025 plan year, an employee is considered an HCE if they owned more than 5% of the business in either the current or preceding year, or earned more than $155,000 in the preceding year, 2024.
Contributions are determined by two distinct rates. The “base contribution percentage” is the rate applied to every eligible employee’s compensation up to the integration level. The “excess contribution percentage” is the higher rate applied only to the portion of an employee’s compensation that exceeds the integration level.
The IRS imposes a “disparity limit.” This rule dictates that the excess contribution percentage cannot be more than the lesser of two possible calculations. The first option is simply double the base contribution percentage, and the second is the base contribution percentage plus 5.7%.
Calculating the Contribution Allocation
The calculation of contributions in a permitted disparity plan begins after the employer decides on the total dollar amount it wishes to contribute to the profit-sharing plan for the year.
To illustrate, assume a company decides on a total profit-sharing contribution and sets its base contribution percentage at 4%. The integration level is the 2025 SSTWB of $176,100. Based on the disparity limit, the maximum excess contribution percentage would be 9.7% (the base of 4% plus the 5.7% permitted spread). This creates the two-tiered formula: 4% on compensation up to $176,100 and 9.7% on compensation above that amount.
Consider a plan with two employees. The first is an HCE with total annual compensation of $300,000 and the second is an NHCE earning $80,000. The NHCE’s entire salary is below the integration level, so their allocation is straightforward: 4% of $80,000, which equals a $3,200 contribution.
The HCE’s contribution is calculated in two parts. First, the base contribution is applied to their compensation up to the integration level, resulting in a contribution of $7,044 (4% of $176,100). Second, the excess contribution percentage is applied to the portion of their salary above the integration level, which is $123,900 ($300,000 – $176,100). This results in an excess contribution of $12,018.30 (9.7% of $123,900). The HCE’s total allocation is the sum of these two amounts: $19,062.30.
| Employee | Total Compensation | Compensation up to Integration Level ($176,100) | Compensation over Integration Level | Base Contribution (4%) | Excess Contribution (9.7%) | Total Allocation |
| :— | :— | :— | :— | :— | :— | :— |
| HCE | $300,000 | $176,100 | $123,900 | $7,044.00 | $12,018.30 | $19,062.30 |
| NHCE | $80,000 | $80,000 | $0 | $3,200.00 | $0.00 | $3,200.00 |
The permitted disparity formula shifts a larger portion of the profit-sharing contribution to the higher-paid employee. While the HCE earns 3.75 times the NHCE, their retirement allocation is nearly 6 times greater. This outcome is achieved while remaining within the nondiscrimination rules.
Plan Implementation and Administration
Adopting a permitted disparity formula must be formally included in the plan’s legal documents. An employer must work with a retirement plan provider or a Third-Party Administrator (TPA) to either amend an existing 401(k) or profit-sharing plan or adopt a new plan with the specific permitted disparity language written in. This documentation outlines the chosen integration level and the formula for determining contributions.
If an employer sponsors more than one retirement plan, such as a 401(k) and a separate profit-sharing plan, the permitted disparity rules must be carefully coordinated across all plans. The total contributions cannot exceed the legal limits when combined, and the disparity calculations must account for contributions made in all plans.
A plan with a permitted disparity feature is subject to annual administrative duties. The TPA must perform the allocation calculations each year to ensure they correctly apply the formula and do not violate the disparity limits. These allocations are then reported to the IRS on the Form 5500 series annual return. While the permitted disparity design is a pre-approved method for satisfying certain nondiscrimination tests, the plan as a whole must still meet all other operational and compliance requirements.