An investigation by the WSJ reveals that companies like Intel have begun transferring taxable deferred compensation for senior execs into traditional pension plans, thus saving money on taxes.
This sounds like a scandal, but it really isn’t: if companies get tax breaks for regular-employee pension plans, why shouldn’t they get them for executives as well? One could presumably argue that companies are just now discovering a tax break that they should have been taking advantage of all along:
In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives’ supplemental benefits and compensation.
Any outrage here should be directed at executive compensation in general. The key issue with regard to taxation is whether the pension practices “discriminate” between low-paid rank-and-file employees and fat-cat execs:
IRS rules say pension plans must not “discriminate in favour of highly compensated employees.” If a company wants to give its executives larger pensions — as most do — it must provide “supplemental” executive pensions, which don’t carry any tax advantages.
And don’t worry: the companies provide these supplemental plans, too. As with all tax and accounting rules, there’s a lot of room for interpretation, and companies are obviously doing whatever they can to interpret the rules in their favour. In some cases, no doubt, they’ve gone too far. In others, probably, not far enough.
So, are we really talking about corporations getting “hundreds of millions of dollars” in de facto government subsidies? Yes, if Intel is a proper example:
[Intel’s] tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel’s executive compensation.
Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.
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