Permitted disparity in plan contributions or benefits

The requirements of this subsection are met with respect to a plan if—

(A) in the case of a defined contribution plan, the requirements of paragraph (2) are met, and

(B) in the case of a defined benefit plan, the requirements of paragraph (3) are met.

(A) In general A defined contribution plan meets the requirements of this paragraph if the excess contribution percentage does not exceed the base contribution percentage by more than the lesser of— (i) the base contribution percentage, or (ii) the greater of— (I) 5.7 percentage points, or (II) the percentage equal to the portion of the rate of tax under section 3111(a) (in effect as of the beginning of the year) which is attributable to old-age insurance.

(B) Contribution percentages For purposes of this paragraph— (i) Excess contribution percentage The term “excess contribution percentage” means the percentage of compensation which is contributed by the employer under the plan with respect to that portion of each participant’s compensation in excess of the integration level. (ii) Base contribution percentage The term “base contribution percentage” means the percentage of compensation contributed by the employer under the plan with respect to that portion of each participant’s compensation not in excess of the integration level.

A defined benefit plan meets the requirements of this paragraph if—

(A) Excess plans (i) In general In the case of a plan other than an offset plan— (I) the excess benefit percentage does not exceed the base benefit percentage by more than the maximum excess allowance, (II) any optional form of benefit, preretirement benefit, actuarial factor, or other benefit or feature provided with respect to compensation in excess of the integration level is provided with respect to compensation not in excess of such level, and (III) benefits are based on average annual compensation. (ii) Benefit percentages For purposes of this subparagraph, the excess and base benefit percentages shall be computed in the same manner as the excess and base contribution percentages under paragraph (2)(B), except that such determination shall be made on the basis of benefits attributable to employer contributions rather than contributions.

(B) Offset plans In the case of an offset plan, the plan provides that— (i) a participant’s accrued benefit attributable to employer contributions (within the meaning of section 411(c)(1)) may not be reduced (by reason of the offset) by more than the maximum offset allowance, and (ii) benefits are based on average annual compensation.

For purposes of paragraph (3)—

(A) Maximum excess allowance The maximum excess allowance is equal to— (i) in the case of benefits attributable to any year of service with the employer taken into account under the plan, ¾ of a percentage point, and (ii) in the case of total benefits, ¾ of a percentage point, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum excess allowance exceed the base benefit percentage.

(B) Maximum offset allowance The maximum offset allowance is equal to— (i) in the case of benefits attributable to any year of service with the employer taken into account under the plan, ¾ percent of the participant’s final average compensation, and (ii) in the case of total benefits, ¾ percent of the participant’s final average compensation, multiplied by the participant’s years of service (not in excess of 35) with the employer taken into account under the plan. In no event shall the maximum offset allowance exceed 50 percent of the benefit which would have accrued without regard to the offset reduction.

(C) Reductions (i) In general The Secretary shall prescribe regulations requiring the reduction of the ¾ percentage factor under subparagraph (A) or (B)— (I) in the case of a plan other than an offset plan which has an integration level in excess of covered compensation, or (II) with respect to any participant in an offset plan who has final average compensation in excess of covered compensation. (ii) Basis of reductions Any reductions under clause (i) shall be based on the percentages of compensation replaced by the employer-derived portions of primary insurance amounts under the Social Security Act for participants with compensation in excess of covered compensation.

(D) Offset plan The term “offset plan” means any plan with respect to which the benefit attributable to employer contributions for each participant is reduced by an amount specified in the plan.

For purposes of this subsection—

(A) Integration level (i) In general The term “integration level” means the amount of compensation specified under the plan (by dollar amount or formula) at or below which the rate at which contributions or benefits are provided (expressed as a percentage) is less than such rate above such amount. (ii) Limitation The integration level for any year may not exceed the contribution and benefit base in effect under section 230 of the Social Security Act for such year. (iii) Level to apply to all participants A plan’s integration level shall apply with respect to all participants in the plan. (iv) Multiple integration levels Under rules prescribed by the Secretary, a defined benefit plan may specify multiple integration levels.

(B) Compensation The term “compensation” has the meaning given such term by section 414(s).

(C) Average annual compensation The term “average annual compensation” means the participant’s highest average annual compensation for— (i) any period of at least 3 consecutive years, or (ii) if shorter, the participant’s full period of service.

(D) Final average compensation (i) In general The term “final average compensation” means the participant’s average annual compensation for— (I) the 3-consecutive year period ending with the current year, or (II) if shorter, the participant’s full period of service. (ii) Limitation A participant’s final average compensation shall be determined by not taking into account in any year compensation in excess of the contribution and benefit base in effect under section 230 of the Social Security Act for such year.

(E) Covered compensation (i) In general The term “covered compensation” means, with respect to an employee, the average of the contribution and benefit bases in effect under section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains the social security retirement age. (ii) Computation for any year For purposes of clause (i), the determination for any year preceding the year in which the employee attains the social security retirement age shall be made by assuming that there is no increase in the bases described in clause (i) after the determination year and before the employee attains the social security retirement age. (iii) Social security retirement age For purposes of this subparagraph, the term “social security retirement age” has the meaning given such term by section 415(b)(8).

(F) Regulations The Secretary shall prescribe such regulations as are necessary or appropriate to carry out the purposes of this subsection, including— (i) in the case of a defined benefit plan which provides for unreduced benefits commencing before the social security retirement age (as defined in section 415(b)(8)), rules providing for the reduction of the maximum excess allowance and the maximum offset allowance, and (ii) in the case of an employee covered by 2 or more plans of the employer which fail to meet the requirements of subsection (a)(4) (without regard to this subsection), rules preventing the multiple use of the disparity permitted under this subsection with respect to any employee. For purposes of clause (i), unreduced benefits shall not include benefits for disability (within the meaning of section 223(d) of the Social Security Act).