Page 313 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 299

Settlements relieve the employer of the pension obligation. An example would be
purchasing annuity contracts or extending lump-sum payouts in exchange for the pension
obligation. Curtailments would reduce, but not eliminate, the pension obligation. An exam-
ple would be a significant reduction in employees on the payroll.

Tax Treatment

Pensions are considered income to the executive and are tax deductible to the company.
A statutory or qualified plan allows an exception to the normal rule of permitting a tax
deduction only in the year in which the executive recognizes the income. The company is
permitted to take a tax deduction the year it makes a contribution to the plan, even though
the executive does not receive the income until a later date.
Legal Requirements

The Employee Retirement Income Security Act (ERISA) subjects all qualified pension and
profit-sharing plans to requirements regarding employee eligibility and vesting, disclosure
and reporting, fiduciary responsibilities, fiscal needs, funding, nondiscrimination structure,
and payment forms. The objective is to ensure employee rights are protected and that
pension benefits will be available when they retire from the company. Companies designing
special early retirement plans to avoid having to terminate excess people need to be very
careful because an analysis of groups and classes may very well tilt to the higher paid,
making the plan discriminatory. Section 411(d)(6) of the IRC prohibits amending a qualified
pension plan to cut back or otherwise reduce accrued benefits of a plan participant.
Nonqualified plans are not subject to these requirements, nor are participants protected on
benefit treatment.
The federal Age Discrimination in Employment Act (ADEA) prohibits companies
from forcibly retiring employees at any age, but allows an exception for executives meet-
ing certain criteria. An executive can be forced to retire if he or she is the head of a major
local or regional operation, or the head of a major department or division, and has a com-
bined company pension (excluding social security and payments from other employers) of
at least $27,000. Several states have similar laws. Such individuals, assuming they were
bona fide executives at least two years immediately preceding retirement, may be retired
by the company beginning at age 65 without concern for violating the terms of the act. For
some, it may be easier to meet the definition of “executive” under the law than to attain the
minimum pension; however, since the latter amount is not indexed, and pay (and therefore
accrued pension benefits) increases each year, more and more individuals will become
eligible for automatic retirement at age 65. Although there are exceptions, most companies
want their executives to retire not later than age 65 (in order to open promotional oppor-
tunities), and therefore offering financial incentives through supplementary pension
arrangements is a logical approach—especially if they were structured to only apply
before reaching a certain age. For example, perhaps only executives retiring before age 62
would receive the supplemental pension benefits. However, the loss of three years of pay
(and its impact on the pension benefit) would probably be greater than the supplement and,
therefore, not result in a lot of retirements at or before age 62. For those who stayed on,
the automatic retirement under the $27,000 ADEA requirement would probably catch
them at 65.