By Pension and Benefits Editorial Staff
The Internal Revenue Service and the Department of Labor should strengthen oversight of executive retirement plans, according to a report released by the Government Accountability Office (GAO).
Background. Executive retirement plans allow select managers or highly compensated employees to save for retirement by deferring compensation and taxes. As of 2017, more than 400 of the large public companies in the Standard & Poor’s 500 stock market index offered such plans to almost 2,300 of their top executives, totaling about $13 billion in accumulated benefit promises. According to the GAO, the advantages of these plans include their ability to help executives increase retirement savings and potentially reduce tax liability, but the plans come with risks as well. To receive tax deferral, federal law requires that the deferred compensation remains part of a company’s assets and subject to creditor claims until executives receive distributions. The Department of Treasury officials and industry experts said executive retirement plans can be tax-advantaged and may have revenue effects for the federal government; however, the revenue effects are currently unknown.
IRS. The IRS oversees executive retirement plans for compliance with federal tax laws. For example, the IRS must ensure that key executives are taxed on deferred compensation in certain cases where that compensation has been set aside, such as when a company that sponsors a qualified defined benefit retirement plan is in bankruptcy. However, the GAO observed that IRS audit instructions lack sufficient information on what data to collect or questions to ask to help its auditors know if companies are complying with this requirement. As a result, the IRS could not ensure that companies are reporting this compensation as part of key executives’ income for taxation.
DOL. The DOL oversees these plans to ensure that only eligible employees participate in them since these plans are excluded from most of the federal substantive protections that cover retirement plans for rank-and-file employees. The DOL also requires companies to report the number of participants in the plan; however, GAO found that the one-time single page filing did not collect information on the job title or salary of executives, or the percentage of the company’s workforce participating in these plans. Such key information could allow the DOL to better identify plans that may be including ineligible employees. Without reviewing its reporting requirements to ensure adequate useful information, the DOL may continue to lack insight into the make-up of these plans and will lack assurance that only select managers and highly compensated employees are participating.
Recommendations. The GAO made four recommendations in its report, including that the IRS improve its instructions for auditing companies that offer these plans, and that the DOL consider modifying reporting by companies to better describe participants in these plans. It was also recommended that the DOL explore actions the Agency can take to help companies prevent the inclusion of the rank-and-file employees in executive retirement plans and provide specific instructions for companies to follow to correct eligibility errors that occur when rank-and-file employees are found to be participating in executive retirement plans.
The IRS and the DOL neither agreed nor disagreed with the recommendations.
Source: “PRIVATE PENSIONS: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans,” GAO-20-70.
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