Don't Make the Federal Government Your Company's Favorite Charity

You work at a decent sized company. That company has a Tax Department. The primary jobs of the Tax Department are to handle the company's taxes legally, and in doing so, to recommend and implement strategies that generally minimize those tax obligations.

Gee, everyone knows that, don't they?

Why do you want to minimize your tax obligations? Well, once you pay out money, you don't get it back. And, if for whatever reason, you happen to view the IRS as your favorite charity, you, the individual (or individual corporate) taxpayer don't get any more or better services for having given them extra money.

It doesn't work that way. In fact, the Internal Revenue Code is a ridiculously complex set of rules that, in total, generates revenue for the federal government. The federal government doesn't check to see who failed to take deductions that they could have and either call them out as being wonderful citizens or provide them with extra goods or services commensurate with the additional taxes that they paid. It doesn't work that way.

During the course of running a business, companies will find that they have large number of payments that they make to governmental or quasi-governmental agencies. For example, banks pay premiums to the Federal Deposit Insurance Corporation (FDIC). They do this so that their customers can feel secure in knowing that their deposits are backed by the United States government (to a point). Premium amounts differ by being in different risk categories. In other words, to some extent, a bank can control the amount of FDIC premiums that it pays.

Similarly, sponsors of defined benefit pension plans pay premiums to the Pension Benefit Guaranty Corporation (PBGC). Those premiums fall into two categories -- the fixed amount per person and the variable amount related to how well the plan is funded. Both of those amounts can be managed, and companies by and large either have been advised to or figured out on their own how to manage the fixed part. The variable rate premium is another story. While there has been a lot of press telling companies to borrow to fund their plans thereby reducing variable rate premiums, there are other techniques that exist.

It all comes down to paying the amount that the law requires you to or paying more. Paying more doesn't get you a trophy. Paying more doesn't get your employees trophies either -- not even participation trophies..

Suppose I told you that you had been overpaying your PBGC premiums by, let's call it, 15X per year. And, suppose I told you that by spending X one time, you could stop doing that. Would you do it?

Proposal to Provide for Increase in PBGC Premiums

"The proposal is both good government and better for business," according to Pension Benefit Guaranty Corporation (PBGC) Director Joshua Gotbaum. "It protects retirement security while encouraging and rewarding responsible business behavior."

I've been in the benefits and compensation consulting business for more than 25 years. I've counseled clients to implement defined benefit plans, redesign defined benefit plans, freeze defined benefit plans, and terminated defined benefit plans. I think this makes me an educated commentator on Director Gotbaum's quote. Yet, I don't get it.

The proposal coming out of the Obama Administration would allow the PBGC, in addition to its current structure of charging both fixed-rate and variable-rate (for plans that it views as underfunded) premiums, to charge premiums related to the financial health of the company. Now, tell me, how does this protect retirement security?

What it will do instead is convince more and more companies to freeze or terminate their defined benefit pension plans, thus reducing or eliminating their prospective premium obligations. This does not protect retirement security. What it actually does, instead, is destroy the pension promise that participants thought they had.

Take note: every time that the government makes the provision of pensions more cumbersome, fewer companies sponsor defined benefit plans. How can this possibly protect retirement security? What it does is protect the PBGC against its own questionable judgment. Time and again, the PBGC has pushed for changes in pension legislation until we got to the point that plan sponsors are required to fund long-term obligations on a short-term basis. Therefore, when assets or liabilities behave poorly, the plan is left 'underfunded' and owes the PBGC more money. Note that a plan that is significantly overfunded gets no relief in its flat-rate premiums. Further, under the vague proposal from the Administration, a plan sponsor of a very well funded plan who has a short-term financial downturn could owe extra premiums to the PBGC.

Tell me again: what does this have to do with protecting retirement security?