October 23, 2023
By: Melanie N. Aska
A recent Social Security Administration news release announced that, for 2024, Social Security benefits will increase by 3.2%, and the Social Security taxable wage base will increase to $168,600 from $160,200.
The increase in the Social Security taxable wage base for 2024 can have consequences under Section 125 cafeteria plans and certain retirement plans.
Retirement Plans. The increase in the Social Security taxable wage base for 2024 can affect the amount of employer profit sharing contributions that will be allocated to eligible participants’ accounts under 401(k) and other types of retirement plans that allocate such contributions using a “permitted disparity” (or “Social Security integration”) allocation formula.
Plans that allocate employer profit sharing contributions using a permitted disparity allocation formula are allowed to provide limited additional allocations to participants whose considered compensation exceeds the Social Security taxable wage base or a lesser threshold amount (called the “integration level”). Participants whose considered compensation is equal to or less than the applicable integration level do not receive such additional allocations.
Under a plan that uses the full Social Security taxable wage base as its integration level, when the taxable wage base increases from $160,200 for 2023 to $168,600 for 2024, only those participants whose considered compensation exceeds the higher taxable wage base ($168,600) will receive limited additional allocations of employer profit sharing contributions for 2024. Participants whose considered compensation for 2023 exceeded $160,200 and who would have received limited additional allocations for 2023, but whose considered compensation for 2024 will not exceed $168,600 will miss out on limited additional allocations for 2024.
Section 125 Cafeteria Plans. A participant’s pre-tax salary reduction contributions under an employer’s Section 125 cafeteria plan are excluded from “wages” subject to Federal income tax withholding and are also excluded from “wages” subject to FICA (Social Security and Medicare) and other employment taxes.
Social Security benefits are calculated based upon an individual’s 35 highest FICA wage-earning years. An individual who makes pre-tax salary reduction contributions under an employer’s Section 125 cafeteria plan will decrease his or her FICA wages on a dollar-for-dollar basis and may end up decreasing his or her Social Security benefits, depending upon the number of years he or she makes such contributions and whether such contributions cause his or her FICA wages to drop below the applicable FICA taxable wage base. For example, a participant whose pre-tax salary reduction contributions never caused his or her FICA wages to drop below the applicable FICA taxable wage bases during those years for which he or she made such contributions would not see any drop in his or her Social Security benefits because of those contributions. But a participant whose pre-tax salary reduction contributions did cause his or her FICA wages to drop below the applicable FICA wage bases for the years of contribution would see a drop in his or her Social Security benefits because of those contributions.
If you have any questions about this news alert, please contact Melanie N. Aska at maska@murthalaw.com or 617.457.4131.
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