I’ve been a little slow in writing this up (alas, I have been absolutely slammed this week), but it’s still worth noting that on Monday, the Wall Street Journal exposed a way that corporations are using their employees’ pension plans to fund big benefits for top executives:
The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.
But their benefits can’t be disproportionately large. IRS rules say pension plans must not “discriminate in favor of highly compensated employees.” If a company wants to give its executives larger pensions — as most do — it must provide “supplemental” executive pensions, which don’t carry any tax advantages.
The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.
Beyond the obvious moral dubiousness of using accounting games to avoid paying taxes on benefits corporations pay to their top brass, the practice hurts workers more directly by increasing the financial burden on the pension plan — if that burden isn’t matched by increased funding by the corporation, the risk that the plan will fail altogether (leaving workers who depended on it holding the bag) goes up.