The IRS's latest revenue ruling includes two tables for determining benefits for retirement plans that used permitted disparity. Here, Candace Dixon explains what changed for 2022 and what this means for an employer.
The IRS has issued Revenue Ruling 2022-2, which contains the covered compensation tables for the 2022 plan year. These tables are used in calculations for defined-benefit retirement plans that use permitted disparity, which is sometimes called integration, to determine employer-provided benefits. Permitted disparity means that the employer chooses to provide an extra benefit to plan participants with compensation above a certain level.
The ways of determining the permitted disparity formula are numerous and quite complex. One must determine the correct integration level when the excess contribution percentage (the percentage of contributions allocated to pay exceeding the integration level) and the base contribution percentage (the percentage that’s allocated to pay less than the integration level) will maximize the contribution allocation. For this reason, plans should use the amounts provided in the tables, as they have already rounded the actual amounts of covered compensation for the different years of birth.
The taxable wage base is $147,000 for determining covered compensation for 2022, an increase from $142,800 for 2021 and $137,700 for 2020. The Social Security Administration in October announced the cost-of-living adjustment to the Social Security taxable wage base for 2022. Maximum earnings subject to Social Security are 15.3 percent FICA payroll tax, 6.2 percent paid by the employer and 6.2 percent paid by the employee.
This significant jump is due to the 2021 increases to the Consumer Price Index, which rose 6.2 percent from October 2020 to October 2021, the largest 12-month increase since November 1990, according to a Bureau of Labor Statistics report in November 2021. Prices have been noticeably rising over the past year, with energy prices increasing 30 percent, the food index by 5.3 percent and other items, including both new and used vehicles, by 4.6 percent, the largest 12-month increase since August 1991. The price of gas rose 49.6 percent over the last year, the highest increase since September 2014.
While employers had some indication that this increase was inevitable, giving them time to prepare, because of the strict and complex guidelines under IRC Section 415(b) to prevent employers from using benefit plans as tax shelters for highly compensated employees, the best option is to have an enrolled actuary determine the amount that can be put into a defined-benefit plan to protect its tax-exempt status.
Register for free to continue reading
It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:
Candace J. Dixon has been in practice as an accountant since 1996. She has a Bachelor's Degree in Accounting from Saint Leo University in Tampa, Florida, and is a Certified Advanced QuickBooks ProAdvisor. She specializes in taxation and advanced accounting, and is known for being well-versed in the Internal Revenue Code and the gig economy. Her...