Corporations "STEAL" Workers' Pensions To Fund CEO Pensions
"The evidence is laid out today in The Wall Street Journal by reporters Ellen Schultz and Theo Francis. These two reporters have done an excellent job covering pension issues: more than two years ago, they clearly laid out the evidence that it was CEO pensions, not workers' pensions, that were causing headaches for corporate balance sheets. Today, they tell us:
At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.
In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.
The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.
"How they pull this off is a scam that is a bit convoluted so let's follow the reporters here:
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.
Ah, and ever clever, the companies, looking for a way to fleece workers and the taxpayer (because contributions to pension plans are tax-deductible), found a way, as the example of Intel, the computer chip maker, shows:
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'sexecutive 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.
....The result, though, is that 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.
"So, not only are CEOs now going to be paid out of the regular company pension plan, you, the taxpayer, get to fund it! Isn't America great? And, of course, the pension plan's assets now benefit the highly-paid top dogs, not the workers. Nice."
Tasini goes on to explain how these corporations get around IRS rules requiring that pension plans not discriminate between lower-paid and higher-paid workers to create this sham.
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