When the average corporate Chief Executive Officer (CEO) makes $10,982,000 a year – which is 262 times the annual wage of an average worker, and 821 times more than what a minimum wage-earner takes home in a year – you would think that the well-to-do wouldn’t feel the need to plunder those less well-off. Sadly, you’d be wrong.
And just to put that growing cavernous income gap in perspective, it calculates out so that the average CEO will get paid more before lunch on their first day of work than the minimum wage worker will earn for an entire year’s worth of labor.
But that’s not good enough. The Wall Street Journal reports on how corporate executives have moved hundreds of millions of dollars of obligations of the top echelon into their rank-and file pension plans ... for the executives’ and corporations’ own benefit.
WSJ showed in detail how they do it, and the troubling consequences for the rank-and-file. Their report:
... [R]eveals 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.
[My Note: I suspect many of us have the opinion that the Wall Street Journal is a mouthpiece for the Republican Party – and its Op-Ed pages largely are. But the rest of the paper does a top-notch job of investigative reporting. I suspect it’s largely due to the fact that their clientele simply – and quite literally – cannot afford it if they did sloppy work. So give this WSJ article, which is the source for almost the entire Diary, a look ... and see if you don’t agree.]
Even though about half of all pension plans are now frozen, it’s been the goal of the federal government to encourage employers to offer retirement benefits through pensions by providing significant tax deductions to corporations when they contribute to regular rank-and-file plans.
And while executives can also participate, because their salaries are huge compared to regular employees, the IRS rules require that pension plans cannot "discriminate in favor of highly compensated employees." Consequently corporations are required to establish "supplemental executive retirement pensions" – or deferred compensations – which do not provide any tax advantages to the company.
Critical to this shell game’s inception is the fact that supplemental pensions, or deferred compensation plans, for executives are simply unsecured promises – they’re not funded. Corporations don’t set aside assets to cover them because they offer no tax breaks to the company. But if a company could move the supplemental pensions or deferred comps of the high-income executives into their regular pension plans which are established to benefit regular workers, the company can then, under somewhat dubious interpretation of the IRS laws, make a tax-deductible contribution to the fund – and then take a tax break on the funding.
Thus was born QSERP – or "Qualified Supplemental Executive Retirement Plan" – a plan to benefit high-income executives while also providing tax breaks for corporations. But it does so by putting regular workers’ pension plans at risk.
Intel Shows You How a QSERP Works
In just one year (2005) Intel Corp. moved $200 million of deferred IOU obligations from their high-income executives’ non-qualified deferred compensation pension into the rank-and-file’s pension plan through a QSERP. And then turned right around and "contributed" $187 million back in cash to the plan – which they then claimed as a tax deduction.
So when an executive retires, Intel won’t have to pay him/her – the tax-deferred workers’ pension plan will. And that $187 million Intel "contribution" generated an immediate tax break of $65 million for Intel.
That means that you, as a taxpayer, not only just helped compensate Intel’s already wealthy executives retirement, but also got stuck covering the lost revenue resulting from Intel’s $65 million tax write-off. And that was just for one year.
Additionally bothersome is the fact that Intel manipulated the IRS rules so that well over 50% of the tax-deferred money in their rank-and-file pension plan (which is supposed to be designated for worker-bees) is now dedicated to compensating just 4% - that’s right, just 4% of Intel’s entire work force ... the high-income executives.
Plus those rich executives, rather than being required by the law to pay taxes on what they would have withdrawn from their own non-tax deferred pension plans, are now able to roll their wealth over into an IRA – thus further sheltering their money. And that cost you, the taxpayer, even more lost revenues.
Some Are Even Sneakier
Another method to make QSERPs work was found by the insurance conglomerate, Royal & SunAlliance. Just before closing a division and laying off 228 employees, they amended their pension plan to award substantial benefits to just eight departing executives. One such Human Resources executive got an additional $5,270 a month for life.
But the IRS rules require companies to compare what low-paid and high-paid employees receive from pension plans to prevent discrimination that favors the high-income executives. So SunAlliance brought in financial consultants from PricewaterhouseCoopers to calculate just how much disparity they can get away with between the highly paid people and regular workers. As Watson Wyatt, one such consultant, so crassly put it:
"At the end, when the game is over, when the computer is cooling off, you know whether you passed [the IRS nondiscrimination tests] or not."
In order to pass those IRS’s nondiscrimination rules, Royal & SunAlliance had to give tiny little pension increases to the 100 low-level workers. One such employee got a whopping increase of $1.92 a month. (That’s a measly 0.0036% of what the executive who increased his benefit by $5,270 a month enjoyed.)
Joseph Gromala (a middle manager set to get $8.87 more a month) sued. He claimed administrators of the rank-and-file pension plan violated Royal & SunAlliance’s fiduciary responsibility to operate the plan in the participants’ best interest. The company claimed it was a business decision, not a pension decision - and the conservative Sixth U.S. Circuit Court of Appeals agreed with them.
And If a Company Gets TOO Greedy ... Guess Who Loses?
One of the major risks for rank-and-file workers is when executives get too greedy with their shell game and destroy an entire pension plan – as happened with Consolidated Freightways.
When the faltering trucking firm moved the deferred compensation of its eight top officers into its regular pension plan, it failed to cover that maneuver with any assets at all. So when Consolidated later filed for bankruptcy, it was forced to hand its pension plan over to the government’s Pension Benefit Guaranty Corp. (PBGC) to administer it. But PBGC is only obligated to meet certain limits in pension payouts.
Six low-level employees who loss more than 50% of their retirement benefits sued the consulting firm that had advised Consolidated on their switcheroo, alleging professional negligence. But a federal court ruled against them.
Pssssssstttt ... This Is Just Between You and Me
Not surprisingly, benefit consultants who devise these QSERPs advise companies to keep mum about them in order to avoid an employee uprising. They tell their clients to quietly draw up a memo and give it "only to employees who are eligible" – and that’s probably not you and me.
The IRS, already overloaded and understaffed, admits it’s practically impossible to find these corporations’ shenanigans when their pension plan amendments are hidden in literally hundreds of pages of company calculations, graphs and charts. But the IRS does retain the option, if it finds something unsavory, to rule that the company violated the spirit of the nondiscrimination rules. But don’t hold your breath.
Since highly compensated executives have found a way to tap into the advantages of rank-and-file pension plans – which [1] only benefit the upper echelon and the corporation, [2] put the worker-bees’ retirement pension plan at risk and [3] skirt the laws on paying taxes like the rest of us do – you’d be well advised to look into the availability of 401k options and IRAs in planning for your retirement.