Government Affairs
The IRS and the Department of Labor should strengthen their oversight of executive retirement plans, the Government Accountability Office says in a recently released report.
In “Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans,” the GAO notes that executive retirement plans allow certain managers or highly compensated employees (HCEs) to save for retirement by deferring compensation and taxes. Such plans, the GAO says, help executives increase their retirement savings and have the potential to reduce tax liability.
As of 2017, the GAO reports, more than 400 of the large public companies in the Standard & Poor's 500 stock market index offered such plans to nearly 2,300 of their top executives. That spells approximately $13 billion in accumulated benefit promises. In fact, the GAO says, the plan benefits top executives at large public companies accumulated generally outstripped those of top executives at the smaller public companies in the Russell 3000 stock market index.
These plans do entail a certain amount of risk as well, the GAO says—and not just to plans and executives; they also create some uncertainty for the government. The report says that the Treasury Department and industry experts say that executive retirement plans may affect federal revenues, but those effects “are currently unknown.” In addition, it says, under federal law the executives’ deferred compensation must remain part of a company’s assets and be subject to creditor claims until distributions reach the executives. In short, if a company goes bankrupt, an executive who participates in such a plan may not receive deferred pay.
Limitations on Oversight
The IRS and DOL exercise oversight over executive retirement plans, but their efforts to do so are a bit stymied, the GAO says. Specifically:
- IRS. There is insufficient information in IRS audit instructions regarding what data to collect and questions to ask to help its auditors know if companies are in compliance with the rules concerning executive retirement plans. This means, the report says, meaning that the IRS cannot ensure that companies are reporting such compensation as part of key executives’ income for taxation.
- DOL. The DOL seeks to ensure that only eligible employees participate in executive retirement plans since they are excluded from most of the federal substantive protections that cover retirement plans for rank-and-file employees. For instance, while the DOL requires companies to report the number of plan participants, the one-time single page filing does not collect information on the job title or salary of executives, nor the percentage of the company's workforce that is participating in executive retirement plans. Such information, the GAO says, could allow it to better identify plans whose participants may include employees. This prevents the DOL from gaining insight into those plans’ composition and fails to ensure that only select managers and HCEs are participating.
Recommendations
The GAO makes four recommendations to improve oversight of executive retirement plans:
1. The IRS Commissioner should develop specific instructions within the Internal Revenue Manual, the Nonqualified Deferred Compensation Audit Techniques Guide, or other IRS training material to help IRS examiners in obtaining and evaluating information they can use to determine:
- whether there is a restricted period regarding a company with a single-employer defined benefit plan; and
- if a company with a single-employer pension plan has, during such a period, set aside assets specifically to pay deferred compensation under an executive retirement plan.
2. The Secretary of Labor should review and determine whether the DOL’s reporting requirements for executive retirement plans should be modified to provide additional information that the DOL could use to oversee whether these plans are meeting eligibility requirements.
3. The Secretary of Labor should explore what the DOL could do to help companies prevent rank-and-file employees from being included in executive retirement plans and determine which steps should be implemented.
4. The Secretary of Labor should:
- provide specific instructions for what companies should do to correct eligibility errors that occur when rank-and-file employees are found to be participating in executive retirement plans; and
- should coordinate with other federal agencies on these instructions, as appropriate.
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