1. ©2015, College for Financial Planning, all rights reserved. Session 6 Social Security Integration CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits

2. Session Details Module(s)2,3 Chapter(s)2-3, 3-10 LOs2-4 Describe Social Security integration and vesting as it relates to defined benefit plans. 3-10 Evaluate a situation to recommend whether integration is appropriate in the design of a qualified retirement plan. 6-2

3. Social Security Integration Offset = Permitted disparity for DB only o Allows employer to reduce pension by lesser of 0.75 percent or one-half of the gross benefit percentage up to 50% and is based on Social Security benefits (covered compensation) o Rare to see in real life Excess = Permitted disparity for DB or DC o Allows employer to contribute more for employees above integration point o Integration point can be any dollar amount up to the Social Security wage base 6-3

4. Social Security Integration Offset Example #1 Plan O is an offset plan that provides a normal retirement benefit for an employee who has a social security retirement age of 66 equal to 2 percent of average annual compensation, minus 0.75 percent of final average compensation up to the offset level, for each year of service up to 35. Plan O’s normal retirement age is 66. The offset provided under Plan O complies with IRS’s permitted disparity rules because the offset percentage (0.75 percent) does not exceed the maximum offset allowance equal to the lesser of 0.75 percent or one-half of the gross benefit percentage (one-half x 2 percent =’s 1 percent). 6-4

5. Social Security Integration Offset Example #2 Plan Q is an offset plan that provides a normal retirement benefit for an employee who has a social security retirement age of 66 equal to 1 percent of average annual compensation, minus 0.75 percent of final average compensation up to the offset level, for each year of service up to 35. Plan Q’s normal retirement age is 66. The offset used by Plan Q exceeds the maximum offset allowance authorized by IRS’s rules because the offset percentage exceeds the lesser of 0.75 percent or one-half of the gross benefit percentage. The maximum offset allowance for Plan Q is 0.5 percent (one-half x 1 percent =’s.5 percent). 6-5

6. Defined Benefit Social Security Integration—Excess Plan Permitted disparity of 26.25% + 30% plan benefit = 56.25% above the integration level Permitted disparity of 26.25% + 30% plan benefit = 56.25% above the integration level Plan Benefit: 30% of compensation Social Security Earnings Limit Note: for Unit Credit plans, the permitted disparity is.75% per year of service (35 yr max.) reduced for early retirement provisions. Social Security = 26.25% of covered compensation 6-6

7. Social Security Integration Base Contribution % + Permitted Disparity = Excess Contribution % 10% 20% 40% 30%26.25% (max.) 56.25% 6-7

8. Permitted Disparity (Social Security Integration) in a Defined Contribution Plan 5.7% of Social Security tax Integration allows employer to contribute extra amounts to the qualified plan for compensation above the integration level, replacing what the employer contributes below the Social Security wage base. Employer’s contribution to old age portion of FICA is zero for compensation above the wage base. Amount Contributed $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 5.7% FICA contribution to Old Age portion of OASDI Additional contribution to integrated retirement plan Increasing annual income 6-8

9. Basic Features of Permitted Disparity for Defined Contribution Plans Maximum integration level: The Social Security taxable wage base Base contribution percentage: The rate of contribution for compensation below integration level Maximum permitted disparity: The lesser of 5.7% or base contribution percentage Formula: Compensation: Total compensation, up to $265,000 (2015) 6-9

10. Non-Integrated DC Plan Example Employer Contribution to FICA and MPP as a Percentage of Salary (employer FICA contribution + employer MPP contribution) ÷ comp. 2015 Compensation: $130,000(6,669 + 13,000) ÷ 130,000 = 15.13% $120,000(6,669 + 12,000) ÷ 120,000 = 15.56% $118,500(6,754 + 11,850) ÷ 118,500 = 15.7% $100,000(5,700 + 10,000) ÷ 100,000 = 15.7% $90,000(5,130 + 9,000) ÷ 90,000 = 15.7% $80,000(4,560 + 8,000) ÷ 80,000 = 15.7% $60,000 (3,240 + 6,000) ÷ 60,000 = 15.7% $50,000(2,850 + 5,000) ÷ 50,000 = 15.7% $40,000(2,280 + 4,000) ÷ 40,000 = 15.7% $30,000(1,710 + 3,000) ÷ 30,000 = 15.7% 6-10

11. Integrated DC Plan Example 2015 Employer Contribution to FICA and MPP as a Percentage of Salary (employer FICA contribution + employer MPP contribution) ÷ comp. $130,000(6,754 + 13,000 + 655) ÷ 130,000 = 15.7% $120,000(6,754 + 12,000 + 85) ÷ 120,000 = 15.7% $118,500(6,754 + 11,850) ÷ 118,500 = 15.7% $100,000(5,700 + 10,000) ÷ 100,000 = 15.7% $90,000(5,130 + 9,000) ÷ 90,000 = 15.7% $80,000(4,560 + 8,000) ÷ 80,000 = 15.7% $60,000 (3,240 + 6,000) ÷ 60,000 = 15.7% $50,000(2,850 + 5,000) ÷ 50,000 = 15.7% $40,000(2,280 + 4,000) ÷ 40,000 = 15.7% $30,000(1,710 + 3,000) ÷ 30,000 = 15.7% $20,000(1,140 + 2,000) ÷ 20,000 = 15.7% $10,000(570 + 1,000) ÷ 10,000 = 15.7% 6-11

12. Question 1 Which of the following statements correctly describe permitted disparity rules (Social Security integration) for qualified plans? I.Offset integration may be used only in a defined benefit plan. II.Integration allows the owner of a business to skew plan contributions or benefits in favor of highly paid employees. III.In integrated defined contribution plans, the excess contribution percentage is the difference between the base contribution percentage and the permitted disparity. IV.In offset integration, a participant’s qualified plan benefit may not be reduced by more than 50%. a.I only b.II only c.II and III only d.I, II, and IV only e.II, III, and IV only 6-12

13. Question 2 XYZ Company contributes 3% to a money purchase plan for eligible employees. The owner plans to use permitted disparity (Social Security integration) to increase contributions for higher-paid employees. Which of the following statements is (are) correct regarding this money purchase plan? I.The maximum percentage contribution that XYZ can make for compensation in excess of the plan’s integration level is 3%. II.The maximum percentage contribution that XYZ can make for compensation in excess of the plan’s integration level is 6%. III.The maximum percentage contribution that XYZ can make for compensation in excess of the plan’s integration level is 8.7%. IV.The plan’s permitted disparity is 3%. V.The plan’s permitted disparity is 5.7%. a.II only b.I and V only c.II and IV only d.III and IV only e.III and V only 6-13

14. ©2015, College for Financial Planning, all rights reserved. Session 6 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits