increase by the CPI;50 • Eliminate the excise tax on non-deductible contributions, since it only serves to discourage desirable funding, and the high reversion tax discourages employers from contributing excessively; • Allow deductions for a normal cost in all years; and • Allow deductions up to termination liability, or an ongoing liability, including the present value of all benefits (with restrictions for small employers). It appears that the administration has proposed allowing deductions up to 130 percent of the plan’s funding target, which is determined using ongoing retirement assumptions for healthy companies and earliest retirement ages for companies below investment grade. We are not sure why the deductible amount should be larger for weak companies, when they will be least likely to afford additional contributions. We suggest that the target be the larger amount for healthy companies, also. We also note that a typical plan funded at 130 percent on Jan. 1, 2000 would have been around 83 percent funded on Jan. 1, 2003 and around 90 percent funded on Jan. 1, 2004 and Jan. 1, 2005. The plan would be underfunded even if equities were 50 percent of plan assets and longer-term bonds were held, so Congress might want to increase the 130 percent to 150 percent (or 130 percent if applied to termination liability). If there is concern that this reduces tax revenue too much, then we note that if greater contributions are made in one year, they will reduce tax expenditures in the following years, and they can reduce PBGC claims. In addition, the provision could be limited to PBGC-covered plans, if desired. Reduce the punitive reversion excise tax: Employers will not want to create a surplus in their plans if there is a chance that they will never be able to use it. For example, if a plan sponsor makes contributions until a 50 percent funding margin is created, and then asset returns are unusually good, the plan sponsor may never be able to use all of the surplus funds. If an employer has to terminate the pension plan, it could be forced to give over 90 percent of the surplus to the government (due to the addition of punitive excise taxes of up to 50 percent on top of a 35 percent corporate income tax, and possible state taxes). Prior to the punitive excise tax, employers regularly contributed more than the minimum. In fact, it was often part of their funding policy. Now, most employers just contribute the minimum. If the reversion excise tax were reduced to a less punitive level,51 they would contribute more. While employee groups do not want to make it easy for corporate raiders to access the funds quickly, there may be ways to address this concern. For example, the law could require that only a small amount of super-surplus could be withdrawn each year (e.g., 5 percent or 10 percent of assets), and it could prohibit withdrawals and reversions within, for example, three years of a take-over. Expand IRC Sec. 420 transfers: There is also another solution. IRC Sec. 420 transfers of pension surpluses to retiree health plans could be expanded to allow super-surplus in a pension plan to be used for other employee benefits, such as employee health benefits. Some employee groups have expressed an interest in this idea because higher health costs and the lack of tax advantaged funding alternatives are jeopardizing the provision of retiree health benefits by some employers. Use of the pension super-surplus might help continue their company-provided retiree health plans. If the pension plan is subject to bargaining, then the rules could include the involvement of the union. Plan sponsors would also like the five-year maintenance rules shortened or relaxed, in order to allow more of them to use IRC Sec. 420. In the 1990s the Academy opposed a reversion proposal in the House, which ultimately did not pass. However, we would like to note that our opposition was because the proposal did not set a high enough threshold for determining the super surplus, and the excise tax was so small that it would encourage tax evasion. It was not because we were against the idea of withdrawals. In fact, we think that the ability of sponsors to access pension assets is necessary if policy-makers want to encourage better funding in good years and adequate funding in difficult times. Employee groups might also be amenable to these ideas if some of the restrictions mentioned above are included: If there is a concern that small plans could abuse this rule, it could be restricted to PBGC-covered plans, or plans with more than, e.g., 50 nonhighly compensated employees (NHCEs). 51 Treasury would probably want the tax to be at least as large as the normal corporate tax rate plus an excise tax large enough to undo the tax advantages while in the pension plan so that employers didn’t use the pension plan for tax reduction. 50
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Pension Funding Reform For Single Employer Plans