TAKING ADVANTAGE OF EMPLOYER SOCIAL SECURITY CONTRIBUTIONS
IN RETIREMENT PLANNING
By: Matt W. Zeigler, Esq.
In the 1930s, the federal government set up the basis of our federal retirement system today.
Over the years, employees and employers have made contributions to secure a fund of dollars to be repaid
to us in our retirement. In the 1990s, this becomes even more important than ever, for this year, for the
first time ever, more of our the population of the United States are over 40 years old than are under 40.
By the year 2030, fully 25% of our population will be older than age 65; and of that number, another 25%
of those will be "Super Elderly", i.e. ages 85 and older.
Retirement and retirement income planning is increasingly becoming a focus of the workforce
and the funding of that is the employer's concern. In considering this, employers are reviewing the effect
that mandated governmental insurance programs have on private retirement plans. If the social security
programs were not considered, the lower-paid employees would receive, as a total retirement benefit, a
higher proportion of their regular income than the more highly paid employees. Recognizing this inherent
inequity, Congress even though all of the "simplification" of the tax code since 1986, has left intact the
fact that employer-paid social security benefits are given direct recognition (credit) in formulating the
amount of benefits contributed by employers on behalf of the lower paid employees.
Since the employer already pays 7.65% of the employee's compensation up to $53,400 in social
security taxes for 1991, Congress and the Internal Revenue Service permit employers to credit themselves
with a portion of this tax toward funding the retirement benefits for employees. The idea has been called
"Social Security Integration" and is now called "Permitted Disparity". The goal of the "integrated" plan is
to consider all benefits paid for by an employer on behalf of its employees who work and then retire and
yet remain fair to the employees by providing retirement income proportionate for all employees
regardless of their salary level. Through all of the changes that have occurred in the tax code since the
enactment of ERISA in 1974, the provisions for Social Security Integration have not been threatened and
are likely to remain with us long into the future.
Basically the idea is this: under a properly integrated plan, the total retirement benefits of both the
high paid and the low paid employees are a uniform percentage of salary at all levels. All employees are
treated as receiving a benefit from the employer equal to the amount of social security payments made on
behalf of each employee. The overall effect is to actually lower the amount of the employer's
contribution to a private plan while maintaining the same proportionate level of benefits contributed on
behalf of all employees based on the amount of their respective salary levels.
This is how social security integration works: Take an employer who desires to contribute 10%
of pay to all participating employees, with an "integration" level set at $10,000. The design of the plan is
such that employees will receive plan contributions of 5% of salary up to the integration level of $10,000
and 10% of salary above the integration level of $10,000. This means that employees earning up to
Michigan Food News, Personnel Notes, published August, 1991: Vol. 45, No. 8
© Zeigler & Associates, P.C., 3001 W. Big Beaver, Suite 408, Troy, MI 48084-3105
$10,000 in compensation for that year will receive an employer contribution of a total of 10% of
compensation. This 10% consists of contributions from (1) the social security taxes already paid and (2)
an additional new contribution to the employer sponsored retirement plan of only the remaining 5% of
salary which is new money contributed. The employer's actual out-of-pocket cost in contributing to the
plan is actually less when the social security taxes are included in this computation.
This is best illustrated by two examples; one without social security integration, and one
considering the social security taxes paid:
Example #1: No Integration. Suppose an employer has a regular profit sharing plan and
desires in 1991 to make a 10% contribution to the plan. The contribution is figured as a straight percent
of compensation; earned wages times 10%.
Wages
Employee A
Employee B
Employee C
Employee D
Employee E
80,000.00
30,000.00
22,000.00
15,000.00
8,000.00
10%
Contribution
8,000.00
3,000.00
2,200.00
1,500.00
800.00
TOTAL
155,000.00
15,500.00
In this example, the non-integrated plan has an employer out-of-pocket contribution of $15,500.
Example #2: Integration.
Suppose an employer has a the same profit sharing plan but
adding only social security integration with an integration level of $10,000. The plan design will be
modified such that participants will receive an employer contribution equal to 5% of compensation for all
amounts earned below $10,000 and a 10% employer contribution for all amounts earned above $10,000.
Wages
Employee A
Employee B
Employee C
Employee D
Employee E
TOTAL
80,000.00
30,000.00
22,000.00
15,000.00
8,000.00
155,000.00
Integration
Level
10,000.00
10,000.00
10,000.00
10,000.00
8,000.00
Excess
5% Base
Compensatio Contribution
n
70,000.00
500.00
20,000.00
500.00
12,000.00
500.00
5,000.00
500.00
0.00
400.00
107,000.00
2,400.00
10% Excess
Contribution
Total
Contribution
7,000.00
2,000.00
1,200.00
500.00
0.00
7,500.00
2,500.00
1,700.00
1,000.00
400.00
10,700.00
13,100.00
Thus, the total employer contribution will be $13,100, or $2,400 less than the plan that is not
integrated with social security.
Integrating retirement plan benefits at a salary level, for example at $10,000, favors employees
earning more than $10,000 as compared with those earning below that rate because the amounts paid for
social security taxes are acknowledged. Those employer paid contributions to employees earning below
Michigan Food News, Personnel Notes, published August, 1991: Vol. 45, No. 8
© Zeigler & Associates, P.C., 3001 W. Big Beaver, Suite 408, Troy, MI 48084-3105
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$10,000 per year are considered approximately offset by the social security benefits already paid for by
the employer. (Note that the integration level can be set at anywhere between $10,000 and the taxable
wage base of $53,400, as adjusted from year to year; however, new regulations limit the maximum
percentage of compensation that an employer can contribute for employee's excess compensation. That
maximum limit is no more than 5.7% over the base contribution rate. This works in the above example
because the base contribution rate is 5% and the excess contribution rate is 10%, a difference of only 5%.)
Of the employer's share of social security taxes presently paid in 1991 on the first $53,400 in
income, 5.6% of that portion of the social security taxes is attributable to the "old age" portion of the
social security tax. That 5.6% that the employer has already paid is used by "integrating" those
contributions into a retirement plan. This 5.6% that is already paid is used to offset additional employer
paid benefits contributed a private employer-sponsored retirement plan on behalf of an employee.
The net effect is that an employer can contribute an amount of money to a retirement plan that is
weighted in favor of the more highly compensated employees than in a straight profit sharing or money
purchase plan. However, when social security employer paid contributions are taken into account, the
result is to even out all employees so that all employees receive the same retirement plan benefits as a
percent of compensation.
A second effect is that the amount of cash needed to fund the employer's private retirement
benefit plan is actually less using the integrated formula rather than using a straight percent of
compensation formula, for example, 10% of compensation.
Integrated plan are not permitted in such plans as a 401(k) plan, and a special plan document is
needed if one is to use a Simplified Employee Plan, the IRS's "SEP". Integrated formulas are permitted in
the traditional forms of profit sharing and money purchase plans as well as defined benefit plans.
Some of the drawbacks to using an integrated formula for employer contributions are that it will
be more expensive to administer because the minimum integration level will change each year, and the
integration calculations require several more levels of plan allocations than a straight percentage of
compensation. All in all, however, the savings to an employer with a number of employees below the
minimum integration level will more than offset the additional costs of plan administration. You may
wish to review your cost savings with your professional advisors before considering the idea further.
Michigan Food News, Personnel Notes, published August, 1991: Vol. 45, No. 8
© Zeigler & Associates, P.C., 3001 W. Big Beaver, Suite 408, Troy, MI 48084-3105
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