U.S. organizations take advantage of tax breaks for pension contributions
While many companies are freezing pension plans, some in the United States are converting the plans into resources to finance executives’ retirement benefits and pay.
That’s according to a story in the Wall Street Journal that says companies such as Intel and CenturyTel have moved hundreds of millions of dollars of obligations for executive benefits into pension plans of regular employees. This gives the organizations tax breaks meant for pensions for regular workers, which they use to pay for executives’ supplemental benefits and compensation.
This practice could drain assets from pension plans and make them more likely to fail, says the Journal, however the Internal Revenue Service (IRS) does not track this kind of maneuver.
Federal law in the U.S. encourages employers to offer pensions by giving companies a tax deduction when they contribution cash to a plan and by letting the money grow tax free. But IRS rules says pension plans cannot “discriminate in favour of highly compensated employees” so if a company wants to give executives larger pensions, it must provide supplemental plans without tax advantages.
So “the trick” says the Journal, is to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks.
For example, Intel had an obligation to pay deferred compensation to executives upon their retirement or departure. In 2005, the chip maker moved more than $200 million US of deferred compensation owed into its pension plan. Then it contributed $187 million US of cash into the plan. Now Intel can pay deferred salaries to executives through the pension plan, says the paper. And Intel’s contribution to the pension plan was deductible immediately, for tax savings of $65 million US in the first year.
“In other words, taxpayers helped finance Intel’s executive compensation,” say Ellen Schultz and Theo Francis of the Wall Street Journal.
And as more companies phase out pension plans by freezing them, this leaves more pension assets available to cover executives’ compensation and supplemental benefits. A number of companies have shifted executive benefits into frozen pension plans, says the Journal. They can do this by increasing an executive’s benefit in the regular pension plan by a certain amount and cancelling that same amount of the executive’s deferred compensation or supplemental pension.
Generally, only the executives are aware of this kind of activity, says the paper, and benefits consultants advise companies to keep quiet to avoid an employee backlash.
