The Impact of Tax Legislation on Corporate Income Security Planning for Retirees

Ruth Ylvisaker Winger

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429955129
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1991, explores the complexities of the relationship between acts of Congress and nine major US corporations regarding employer-sponsored retirement plans. The study was designed to discover if and why corporate decision makers respond to the Congress tax incentives or the disincentives that affect the design of corporate income security plans for retirees.

APPENDIX A

LEGISLATIVE HISTORY

Richard Titmuss was critical of the American welfare state as the only modern industrialized nation to base income security for the aged on both market criteria and need. In the United States the distribution of resources through labor force participation plays an important role in the welfare state.

Occupational welfare, in the form of income security plans for retirement, is available to employees of organizations interested in deferring compensation for their employees. The American employers have collaborated with the Congress to develop a significant source of privately sponsored, work-related, income security system for retirees. These income security plans cost the government fifty billion dollars in foregone taxes in 1985 (Reich, 1987). At the same time, private employers paid out ninety billion dollars in retirement income to fifteen million recipients (Andrews, 1985).

Congress has reinforced the role of the employer in the distribution of occupational welfare benefits through statuatory policy and special tax treatment. It is probably not surprising that Congress has encouraged employers to share the responsibility for welfare.

Historically, Americans have believed in the value of work. This commitment to the value of “honest labor” is one of the few shared values in the culture of the nation. This shared value has lent a cohesiveness to the American society in the same way that religion and political ideology have cemented other cultures (Ozawa, 1982).

The interest of government employers and private corporations in the protection of income in old age predates that of Congress. The City of New York established a pension fund for the City’s policemen in 1857. This plan was the nation’s first public pension fund to cover state or local government employees. Eighteen years later, in 1875, the American Express Company became the first company in the United States to establish a pension plan that was financed solely by the employer. In 1880, the Baltimore and Ohio Railroad became the first organization to sponsor a plan with contributions from both employer and employee.

Income security in retirement came to academia when in 1892 Columbia University pensioned its professors who had fifteen years of service. Chicago followed on the heels of Columbia University and pensioned public school teachers in 1893. In 1901 Carnegie Steel developed the first pension plan in the steel industry to endure. Not to be outdone, Standard Oil offered employee pensions in 1903. The Granite Cutters of America, in 1905, became the first union to actually pay pension benefits to its members. That same year the Carnegie Foundation for the Advancement of Teaching established the teachers’ insurance plan for retirement income. Congress joined the act in 1920 by creating a fund to support Federal Civil Service Retirement and Disability. In 1921 Metropolitan Life Insurance Company broke new ground by offering the first group annunity contract in the United States (American Council of Life Insurance, 1985).

Private initiatives in the development of these income security plans were first supported by Congress with the Revenue Act of 1921. This Act gave tax exempt status to company-sponsored trusts that financed qualified profit-sharing or stock-option plans. Five years later with passage of the 1926 Revenue Act, trustees as well as the insurers of these trusts were given tax exempt status on the trust earnings. By 1950 there were two thousand pension funds in the United States (Drucker, 1976).

The next legislation to affect privately sponsored retirement plans was the monumental Internal Revenue Act of 1942. This act contained the first substantive national public policy considerations for democratizing the private pension plans. In order to qualify for tax exempt status after the 1942 Revenue Act the private sector was required to design pension plans that were non-discriminatory. This condition was defined by the Internal Revenue Service (IRS) as:

1. The plan must be for the exclusive benefit of employees and/or their beneficiaries.

2. The sole purpose of the trust must be to give employees a share of employer profits.

3. The plan must be permanent, in writing and communicated to the employees.

4. The plan must not discriminate in favor of officers, stockholders or the highly compensated.

In addition, the 1942 Act specified that employer contributions to a pension would not be taxed as current income to employees but would be taxed when received as income. This was the introduction of the tax advantages for deferred compensation in industry (King, 1978; Munnell, 1982).

In retrospect, the 1942 Act is considered limited in scope. However, it did serve to provide some national standards for retirement income plans. In addition, new tax incentives were offered to the private sector to encourage the further development of pension plans. In 1950, twenty-two percent of all workers participated in pension plans. By 1970 participation in private pensions plans had increased to forty-eight percent of the working population (Kolodrubetz, 1972).

In contrast to the plethora of pension legislation enacted in recent years, the only significant pieces of legislation to be enacted between 1942 and 1974, were the Taft-Hartly Act in 1947, and the Welfare and Pension Disclosure Act in 1958. The Taft-Hartly Act created the negotiated trusteeships between corporations and the unions. The courts ruled in the case of Inland Steel that employers of organized industries were required to negotiate pension benefits, placing them for the first time, within the union’s “terms of agreement.” The Welfare and Pension Disclosure Act in 1958, addressed financial abuses on the part of pension fund trustees. Amazing though it may seem, at no time prior to 1974 did the Internal Revenue Service indicate a concern for the financial soundness of the private pension plans. Nor did Congress express a concern for the rights of the participants to accrued assets (Kolokubetz, 1972).

Impact of the Private Sector

The Inland Steel case, by introducing pensions as a negotiable labor relations item, precipitated changes which were initiated by Charles Wilson, the chief executive officer of General Motors. Considered radical at the time, Wilson’s 1950 proposal to the United Auto Workers changed the structure of the private pension funds in significant ways. Wilson proposed that pension investments no longer focus on annuities such as government bonds and mortgages.

These fixed and low-interst pension fund investments were rejected for capital-based equities. This placed pension funds in production resources rather than in government resources that had debt claims against them. This change from investment in government bonds and other annuities, to investment in the market through equities, made pension funds the business of the private sector. This created a greatly improved investment vehicle to support the financial liabilities of corporate promises for income security for retirees.

By default then, this structural change represented a much greater “expense”, and new level of public financial support, via tax deferrals and exemptions, to Congress. In addition, before this, Congress was exempting from taxes what was largely the business of Congressional robbing-Peter-to-pay-Paul, so to speak. Also significant, the Wilson plan was contingent on the relinquishment of union control of the pension funds to the company, for management by independent assets managers (Drucker, 1976).

This gave pension funds, according to business, the potential of more reliable management by professionals in the business. It also changed the locus of control of large pools of money from the unions and the workers to the insurers and trustees of pension funds in the banking industry, reducing, by consolidation, the base of the income tax system. With this change of control, went the financially significant tax advantage on pension fund earnings to the trust sponsors, via the trust fiduciaries, consistent with the 1926 legislation.

Interestingly, it was found in 1985 that early estimates by the Securities and Exchange Commission (SEC) on pension trust fund assets on which Congress had based most information, were seriously underestimated. Belatedly, Congress has recognized the impact of the pools of pension funds on the banking and insurance markets, and the dynamic created by the tax revenue that is foregone (Andrews, 1985).

General Motors, acting without Congressional mandate, and most likely pre-empting Congressional understanding of the potential of trusts for manipulation and avarice, established four rules for good pension management. These rules were adopted by the majority of large employers and were also incorporated into the 1974 Employee Retirement Income Security Act. The four rules for employers to live by were that:

1. Pension funds were to be professionally and flexibly managed, as investments under the administration of the corporation.

2. There should be a minimal or better still, no investment in the employing corporation.

3. There should be no investment in any one company in excess of five percent of the company’s total capital.

4. There could be no more than ten percent of the fund’s total assets invested in the employing company.

In the opinion of Wilson, “Investing the worker’s main sav...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• LIST OF TABLES
• ACKNOWLEDGEMENTS
• I. INTRODUCTION
• II. BACKGROUND OF THE STUDY
• III. RESEARCH METHOD
• IV. CORPORATE RESPONSE TO LEGISLATION
• V. INCOME SECURITY PLANS IN THE CORPORATION
• VI. DISCUSSION
• APPENDIXES
• SELECTED BIBLIOGRAPHY
• GLOSSARY OF DEFERRED COMPENSATION TERMINOLOGY