Tag Archives: tax reform

Tax reform provides incentive to accelerate pension contributions

The end of 2017 saw the passage of significant tax reform in Congress. With this tax reform, the corporate tax rate has dropped from 35% to 21%, generating quite a bit of attention due to the significant savings that will result for corporations. One relatively unpublicized result has been the additional funding of cash contributions to corporate defined benefit plans.

While contributions made for the 2018 plan year will generally be deducted at the new lower corporate tax rate of 21%, contributions for the 2017 plan year will generally be deducted at the higher rate of 35%. For many corporations with underfunded pension plans, contributing additional dollars or accelerating already planned contributions will generate a net tax savings because underfunded plans are expected to eventually require additional contributions.

More and more, the plan sponsors are issuing corporate debt to make additional pension contributions. For example, General Electric recently announced that it was making a discretionary contribution of $6 billion into its pension plan funded through debt.

In addition to recent tax reform, here are three other reasons we are seeing this trend on the rise:

1. Skyrocketing Pension Benefit Guaranty Corporation (PBGC) premiums. The variable rate premium that corporations pay on underfunded liabilities has increased from 3.4% of the underfunding in 2017 to 3.8% in 2018 (and 4.2% in 2019, as listed in the PBGC website). Any contribution in 2018 to the pension plan immediately reduces the PBGC premium by 3.8% in 2018 (and more in future years). Additionally, that money would then be invested and anticipated to grow with the plan’s expected return (say 6.25%). This leads to an effective return on capital of 10.29% in 2018 (and 10.71% in 2019), and higher returns are anticipated in future years.
2. Updated mortality will drive PBGC liabilities higher by approximately 4%, leading to significant increases in the variable rate contribution.
3. Corporate interest rates remain low and corporations are able to borrow at relatively low costs.

For the purpose of example, let’s look at a theoretical additional contribution of $10 million into an underfunded pension plan. This additional contribution would:

• Reduce fees paid to the PBGC by $380,000 in 2018 (and $420,000 in 2019, and growing in following years)
• Be invested in the trust, and therefore would be anticipated to grow by a company’s expected return on assets in 2018 (likely 5% to 7%, which translates to $500,000 to $700,000 on a full-year basis)
• Reduce the Financial Accounting Standards Board (FASB) accounting expense in 2018 and beyond (by an amount similar to investments in the trust, depending on timing)—to the extent these contributions were anticipated at the beginning of the fiscal year
• Be tax-deductible at the 2017 corporate tax rates because any contribution before September 15, 2018, can count as a 2017 plan year contribution for calendar-year plans

However, there are some limitations:

• While plans that are fully funded on a PBGC basis will not see additional PBGC savings, they will see the additional tax and expense savings as outlined above
• Because of the structure of the PBGC variable rate premium, additional contributions to plans at the PBGC variable premium cap (due to head count) may not share the PBGC advantages, but will see the additional tax and expense savings as outlined above

With tax reform now in place, many corporations are poised to take advantage of opportunities to improve the financial status of their defined benefit retirement plans. Acting sooner rather than later on this opportunity will enable them to stabilize and move their plans more firmly into the black.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

CBO issues cost estimate of House GOP tax bill and scores estimated deficits and debts under Senate tax bill
In the House, H.R. 1, the Tax Cuts and Jobs Act, would amend numerous provisions of U.S. tax law. The staff of the Joint Committee on Taxation (JCT) estimates that enacting the bill would reduce revenues by about $1,438 billion over the 2018-2027 period, and decrease outlays by $2 billion over the same period, leading to an increase in the deficit of $1,437 billion over the next 10 years. For the Senate’s tax bill, the staff of the Joint Committee on Taxation determined that provisions in the Chairman’s Mark would increase deficits over the 2018-2027 period by $1.5 trillion (not including any macroeconomic effects). By the estimate of the Congressional Budget Office (CBO), additional debt service would boost the 10-year increase in deficits to $1.7 trillion. As a result of those higher deficits, debt held by the public would increase from the 91.2% of gross domestic product in CBO’s June 2017 baseline to 97.3%.

For more information, click here and here.

IRS releases new information package
Defined Contribution Listing of Required Modifications and Information Package contains samples of plan provisions that have been found to satisfy certain specific requirements of the Internal Revenue Code, taking into account changes in the plan qualification requirements, regulations, revenue rulings, and other guidance in the 2017 Cumulative List of Changes in Plan Qualification Requirements (Notice 2017-37, 2017-29 I.R.B. 89). The package has been prepared to assist providers who are drafting or redrafting plans to conform to applicable law and regulations, with the goal that it will be a key factor in enabling the Internal Revenue Service (IRS) to process and approve preapproved plans more quickly.

For more information, click here.

Multiemployer program deficit widens to $65.1 billion, single-employer program improves according to PBGC annual report
The Fiscal Year 2017 Annual Report of the Pension Benefit Guaranty Corporation (PBGC) shows that the deficit in its insurance program for multiemployer plans rose to $65.1 billion at the end of fiscal year (FY) 2017, up from $58.8 billion a year earlier. The increase was driven primarily by the ongoing financial decline of several large multiemployer plans that are expected to run out of money in the next decade.

The PBGC’s Single-Employer Insurance Program continued to improve as the deficit dropped to $10.9 billion at the end of FY 2017, compared to $20.6 billion at the end of FY 2016. The primary drivers of the continued improvement include premium and investment income and increases in the interest factors used to measure the value of future liabilities.

For more information, click here.

Equal Employment Opportunity Commission reports twice as many discrimination lawsuits in 2017
The Equal Employment Opportunity Commission (EEOC) filed more than twice as many discrimination lawsuits in FY 2017 as it did in the previous year, while also putting a significant dent in a persistent backlog of pending investigations that had recently drawn the ire of lawmakers, according to an agency report.

For more information, click here.