Wall St. Journal on Big Companies' Manipulation of the Pension Plans for Executives' Silken Landings Benefit

This blog frequently excoriates big companies for participating in tax shelters, avoiding their fair share of the tax burden, and lobbying for tax breaks that benefit them while causing ordinary taxpayers to bear too much of the overall tax burden.  The reason:  entrepreneurialism and innovation are good, but the "greed is good" version of underregulated, manipulative, whatever-the-big-guys-want "reagonomics" capitalism exercised by most of our large multinational corporations is bad for the country and especially bad for ordinary workers. 

The Wall Street Journal today has another story to add to the list of the ways that big corporations, and their executives, are greedily scamming the tax system for the exec's personal benefit, at the expense of the rank-and-file workers and of all of us ordinary taxpayers.  See Ellen Schultz and Theo Francis, Companies Tap Pension Plans to Fund Executive Benefits, Wall St. Journal, Aug. 4, 2008.

Here's how the Journal describes the scam as employed by Intel:

Intel's case shows how lucrative such a move  [moving obligations to fund supplemental (lucrative) pensions for executives into the tax-favored plans for ordinary employees] can be. It involves Intel's obligation to pay deferred compensation to executives when they retire or leave. In 2005, the chip maker moved more than $200 million of its deferred-comp IOUs into its pension plan. Then it contributed at least $187 million of cash to the plan.  Now, when the executives get ready to collect their deferred salaries, Intel won't have to pay them out of cash; the pension plan will pay them.

Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel's contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel's executive compensation. Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.  *** [As a result,] a majority of the tax-advantaged assets in Intel's pension plan are dedicated not to providing pensions for the rank and file but to paying deferred compensation of the company's most highly paid employees, roughly 4% of the work force.  Id.

Companies that freeze their pension plans for regular workers may still move their obligations for their high-paid executives' supplemental pensions into the tax-favored plan.  The Journal notes that CenturyTel did this for its 18 top executives in 2005 and 2006.

How does the scam work?  Companies effectively move obligations to fund executives' outsize benefits into the regular pension fund, even though the regular pension fund is supposed to provide the tax benefits only when there is no discrimination among workers based on the type of pension benefits they can get.  The problem is the way that the discrimination tests work--they permit companies that want to knowingly scam the system to do so by manipulating the comparison groups of employees, since they do not require calculations for specific employees. 

To prove they don't discriminate, companies are supposed to compare what low-paid and high-paid employees receive from the pension plan. They don't have to compare actual individuals; they can compare ratios of the benefits received by groups of highly paid vs. groups of lower-paid employees.  Such a measure creates the potential for gerrymandering -- carefully moving employees about, in various theoretical groupings, to achieve a desired outcome.

Another technique: Count Social Security as part of the pension. This effectively raises low-paid employees' overall retirement benefits by a greater percentage than it raises those of the highly paid -- enabling companies to then increase the pensions of higher-paid people.  Id.

When companies do this, they don't advertise it to the world.  The Journal reports that benefits consultants advise the companies to keep it quite, so employees don't find out about it and cause an uproar.

What to do?  First, the IRS should crack down on these plans--retroactively pursuing the companies for manipulating the anti-discrimination provisions.  As noted in the Journal article, advisers admit that these plans may not hold water (see the reference to Robert Schmidt, whose written advice says that the IRS may decide to pursue these changes for funding supplemental executive pensions, but hopefully not retroactively.)  It is likely that there would be grounds for the IRS to find that inclusion of the executives' obligations in the plans was inappropriate and therefore to essentially bifurcate the plans and assess the companies for the applicable tax liability, without harming the ordinary workers' pension rights.  The anonymous Treasury official quoted in the Journal article (saying that if Congress doesn't like it, Congress can change the rules) sounds like a typical Bush regime functionary favoring big executives over ordinary workers and taxpayers:  that functionary is apparently willing to disregard the explicit nondiscrimination requirement in the legislation, and smooth the way for something intended for ordinary workers to be abused by high-paid executives, claiming it is just too much work to actually look at the companies' determinations.

Second, the IRS and Congress should work together to clarify the regulations and enact specific clarifying legislation, if needed, that clearly makes this gambit unworkable. One obvious requirement--that any inclusion of the ten highest paid executives in a tax-favored pension plan with ordinary workers will require a specific nondiscrimination test of the benefits to be received by each of those executives, compared to the benefits to be received by a randomly selected group of individual workers in the lowest paid categories.   These determinations should be made exclusive of any projected Social Security benefits.  There should be a broad anti-abuse rule, either in the regulations or in legislation, that provides a severe penalty for manipulating the plans to provide tax-favored status to supplemental pension obligations

Three, Congress should enact legislation requiring CEOs and other highly paid executives to pay Social Security taxes on their full wages, with a very small incremental increase in the benefit to be earned, so that the amount received declines progressively in accordance with the amount contributed.

Fourth, the government should enact reporting requirements that require companies to provide readily comprehensible public notice of any changes to their pension plans, and in particular require companies to provide such information about any changes in obligations to fund pensions for the highest paid executives that have been included in the plan, along with the total amount of the pensions to be paid those executives.  In other words, specific information about changes to the pension plans and specific beneficiaries of those changes should be required to be published and publicly available.  This is not the kind of information that needs to be kept private; confidentiality here only benefits the executives in obscuring what is going on in a pension plan intended to benefit ordinary workers.

Fifth, workers should react.  When these "stuffed" pensions fail, the ordinary workers lose, and stuffing the plans probably precipitates failure, since there are fewer assets to cover more obligations.  (Some companies, as reported by the Journal, are now also setting up supplemental trusts to take care of the big guys if the pension plan does fail.  They don't seem to care that they are funding high benefits for a few, but not taking care of the many ordinary workers without which their companies couldn't have functioned at all.)   The reason for stuffing the pensions with exeuctives' supplemental pensions is greed.  Workers should recognize that and start taking action.  Write the company executives.  Write letters to the editor of the local newspapers.  Let taxpayers know about the way the company is scamming the IRS and scamming its workers.  Gee, maybe there would even be an increased interest in joining a union and having the power of the collective to negotiate good deals for workers rather than the silken landings provided for executives, even when they fail.