. .. Attachment 2 Attachment 1 q _, 3/83 SUPPLEMENTAL RETIREMENT BENEFIT TAX LEGISLATION 3 2 4 2 0 _ dP _ o_o _o 0 d_ o_ 0 _ dO _ _o EBRI _UESTION: Ln existence 0 of profits. CO 0 Under _ unthe COproposed legislation, QUESTIONS AND ANSWERS REGARDING INTRODUCTIONof a tax-gualified _, plan as 0 a ,-- vehicle O_ to 0provide I _ supple- v-- 00 _ 'I;I presents benefits aare summary actually of paid). the proposal and selected questions and answers. substitution for postretirement Lincreases that .a would have otherwise taken SUPPLEMENTAL RETIREMENT BENEFITS In spite of these drawbacks, why can't employers an employer's contribution to purchase an SRB annuity mental retirement benefits assures employees that the m _ _J continue to increase basic pensions using ad hoc could likewise _ be made contingent on profits; however, -,.4 Would S.I066benefits Lead to Federal will be Revenue distributed Deferrals?equitably and that past and Background Are Employer ThisPensions nation has Indexed? had a longstanding commitment to providing economic place is represented here, and because fewer than 25 percent of plans would 0 payments? the legislation specifically provides that if the o_ current increases in pension benefits will be continued. 0 f-ZO employer fails to make its contribution for any reason, QUESTION: Retirees TEmployers he Federal todayhave government arethe facing ability doesmanyprovide under uncertainties current for fulllaw indexation with to expend respect ofup retiree to 15 security for the aged. This commitment is most broadly emphasized by Social probably use the S.I066 method. ANSWER: Why the is employee's a Supplemental contribution Retirement is toBenefit be returned Programat the to the future earning power of their private pensions -- QUESTION: _0 _ o _ _ _ o _ _ _ --_ _ _ The Employee Retirement Income Security Act of 1974 ("SRB") employee'simportant? request. It should be reemphasized that C 0 ao a_ 0 _ a. ao do benefits under the programs it sponsors (Civil Service Retirement, Military percent Security at of the --total Why same OASI, can't cash time DIcompensation aand pressures supplemental HI. costs Employer on on the retirement sponsored retirement Social Security pension benefit income programs. programs system be provided and The _ [r _'- _0 e_ I I I_ _" Would S.I066 Improve Economic Security of the Retired? ("ERISA") requires essentially that these gratuitous ° once the annuity is purchased the SRB is guaranteed. under current law? continue to grow. As a result; companies and concerned ANSWER:ad hoc payments 0 be treated u_ as retiremento_ payments Retirment, nations largest etc.).employers A majoritare y of currently state and expending local Governments approximately provide 13 for percent, £ull government employeesincentives are taking for their a closer creationlook and at maintenance how they are can the be second It is undeniable that a postretirement pension increase will improve m which must be funded prior to retirement through a ANSWER: QUESTION: Recent sustained periods of double-digit inflation assured of a more sound financial future beyond their indexation as tax-qualified well. retirement plan and must be subject have The May overall the eroded SRB benefits limitations benefit be accrued limited on amounts by to retirees employees allocated during who to their aretire and other employers less. Therefore the law already allows for additional component. working years. economic wellbeing. An automatic index provides certainty for the retiree. A LM -rt to fromvesting servicerequirements with the employer applicable maintaining to pensiontheorSRB careers. A supplemental retirement benefit is participant's account is limited to 25% of compensation, retirement plans. In 1980 Congress amended ERISA benefit, as opposed to employees who terminate service federal Private revintended enue employers deferrals to prese have as raging not ve generally of thetherelative workforce providedbuying and automatic a power growing indexation ofretiree in up to a maximum dollar amount. Since the cost of o 0 ¢"'I eq _ I 0 I Ol U'I capped automatic index provides cost control at the same time for the employer I'_ Ol I I _ 0,I to allow for nonretirement u'1 _ I supplemental i.D CO payments. with an employer prior to retirement with a vested pension payments. purchasing an SRB annuity is high (ranging from Supplemental o Retirement o Benefits (SRB's) _0 However, neither the statute nor the proposed supple- the past. For benefit the approximately ("terminated 6 percent vested o£employees"). employers who do automatically populationo push Social expenditures Security hi benefit gher. indexation has helped achieve economic approximately 70% to 120% of final pay), employer and an absolute limit on potential federal revenue deferrals. mental payment regulations issued by the Department security -- at a cost. contributions to fund an SRB will in most cases exceed One QUESTION: innovative approach to the problem of maintaining the ANSWER: To of theLabor degree permit that passage a sustained of S.I066 annuity created purchase a delay in program consumption index it is not full indexation. Most frequently the adjustment is limited Why don't employers simply increase benefits payable value of private pensions is to provide supplemental the current applicable limits. These advantages of the S.I066 approach are not attributable to @ C C retirement comparable Yes. benefits Presentto in the lawthe SRB doesform proposal. notofrequire insured anannuities employer orto o under Employer their pensions defined have benefit been criticized pensionvis-a-vis plan? Social Security (capped) that would toha 3vpercent e otherwise or 4take percent n place o£ pay. at normal retirement age the federal tax provide because they thedosame not generally benefits index to both benefits. retirees and terminated investment contracts -- jointly funded at retirement by current federal retirement programs. This fact, among others, has caused some QUESTION: SUBMISSION FOR fileRECORD 0 _ _ 0 _ _ _ ANSWER: QUESTION: vested participants, so long as the benefits are provided employees and their companies -- which index other company- How is the employee who purchased an SRB annuity _0 o _ -H .H 0 _ _ dl0 _ ao_ _ _o 0 ao a_ do do deferral would increase. I_ Ol I I I CO ManyHowadditional does an SRB employers programprovide work?ad hoc increases. One recent Theto1963 a Report fair cof ross-section the Kennedy Commission of employees. on Pension At Polic the ysame and the time, providedMostretirement companies' benefits. defined benefit Such supplemental plans (i.e.,retirement a plan of the Social protected? Security financing problem. Should high inflation return, the oo o 0" •,- _ u ol '_ _0 o t',_ i c t"X o l of ti_e benefitsemployers could gohave a long traditionally way toward limited meeting supplemental rising costs pay- which promises a specific benefit at retirement, such ANSWER: survey0 indicates ,-4To 14 ments the -,4 4Jdegree that tobetween that retirees _S.I066 n-1978 _ as andcreated both 1982 over ansubstitution incentive two-thirdsbehavior o£ andlarge a reward -- employers meaning for 1980 Report of the Carter Commission identified the absence of indexation as during ANSWER:asretirement $I00 per month) and encouraging calculate savings the benefits during payable an to government's flexibility would likely be enhanced by greater indexation of SENATE FINANCE C0_Ili'I"EE Afaithful, participantlong-term in bothservice. a defined benefit pension plan employee's an employee working atyears. retirement Such as an aapproach percentage also of permits final By requiring that the SRB be provided through an annuity SUBCOt_vlITTEEON SAVINGS, PENSIONS AND INVESIi_e2qf POLi¢_ _ 0 provided that the some employer postretirement would provide costthe ofincrease living adjustments. over time instead Tables of funding from this them •"othe criticalandshortcoming a defined "_ ofcontribution employer sponsored plan (i.e., pensions. "_ a plan Recent which books , employers or final to establish average earnings. a coherent Provided program ofanretirement employer's private employer pensions. purchased from a licensed insurance carrier and by .,u ,'el -,q o 0 0._ _ "_ I provides a retirement benefit equal to amounts income salaries protection.keep pace with inflation, the initial pension further requiring that the annuity be fully funded prior HEARING ON survey fully inbythe ,_ Hewitt initialAsyear sociates o_ -- there _ are_owould appended _o be _ no as change Attachement _ in_ofederal _ 2. o_re This venues. _ data is I published by the American _1 Enterprise _i) _ Institute _ _i_and deThe Brookings Institution I contributed to a participant's account, plus earnings) Should the Congress is generally Pass S.I066? adequate to meet a retiree's needs. to the commencement of supplemental benefits, the risk C ,_ c4 r_ _ _0 ('4 maintained by the same employer will be allowed to However, once the pension is payable, its purchasing that the benefit will S.10Oo not be provided is practically C consistent with studies by the Bankers Trust Company of New York. 0 Based upon current '_ indexation trends a _n realistic revenue deferral have emphasized this same point. elect to dedicate a portion of his account balance in Only the Congress can make this decision. The Institute's analysis SRB Legislation 0 power can be rapidly eroded by even a modest rate of nonexistent. It is also conceivable that part of the 0 the defined contribution plan (or from other sources, 0 0 • _ inflation, _ *._ let alone that of recent history. To simply Neld on employer portion of the SRB could also be provided The debate raises two issues: figure can More be and calculated. more employers are facilitating indexation by providing a has concluded that: including personal savings) toward the purchase of an ProposedraiseSRB the legislation benefits payable would allat ow retirement employees to in elect, anticipa- through a defined benefit plan in conjunction with an LU _ insured annuity. The cost of the annuity will be at or tion after ofretirement, cost-of-living to dedicate increasesa portion or to inde of xtheir defined insured benefit under a defined contribution plan oo I Monday, SeptemDer 19, 1983 09 _ _ o o retirement1.benefit Should the option indexation that includes of employera pensions 5 percent be mandated? (or higher) annual 0 o_ ao ao o_ d_ o U ao _o _ d_ shared through a matching employer contribution made tax qualified defined contribution plan (i.e., profit benefit pensions to inflation is itself inflationary (e.g., a 10-year guaranteed investment contract under < __ Ill • o _o m _,o _ m I'-- r_ c0 e_ _ c,i o to the plan at the time of the participant's election. sharing and certain other types of plans) accounts, or and too expensive for most employers. o_ co the defined contribution plan with the remaining supple- Total Annual Defined Benefit Contributions $ 40 billion adjustment2.inShould return the for indexation lower of intitial employer benefits. pensionsS.1066 be facilitated? proposes to allow LLI > m 1. Over two-thirds of employers now provide some form of indexation other The funds,annuity to be will matched provide by empl anoyer escalating contributions, percentage 12_ o mental retirement .-- benefits payable for the remainder of Times Cost of 17 Year 2% Index 17 percent 0 and that _S.I066 would provide one means of regularizing such increase in the pension payable under his employer's toward purchase of a "supplemental From retirement benefit" Z QUESTION: the retiree's life from the defined benefit plan). Z .o_, _,.,_ Cost of Index if all Plans Indexed $6.8 billion such adjustments on a fully pre-funded basis without a reduction in the Fromincreases. EBRI's review of studies and reports of the past, two defined benefit pension plan. in theHow formhave of employers an insured dealtwith annuity. The inflation annuity onwould fixed However, since the defined benefit portion would be Z t_, _ .,4 _ • _-_ o _ o provide retirement an additional incomebenefit in the equal past? to a percentage of Z _ Dallas L. Salisbury* subject _ to o- existing ,--t funding o requirements and guarantees 0 _ promised defined benefit. conclusions are Times prominent. IRS Marginal Tax Rate Assumption* 12 percent 0 >,l._ C_-,4 u] ,_ 2. S.I066 would be consistent with current public policy which 0 _ ,.c 0 • _1 _ o_ a retiree's pension and would compound each year in value. QUESTION: by PBGC, employees who participate in such a program Revenue Deferral if all Plans Indexed $ .816 billion CO o_ _ _ _I -,-I encourages idexation. More ANSWER: specifi What cally, are the the advantages bill, which to anamends employee the of Taxproviding Code: an Z _ _ • _ will Revenue beDeferral fully protected. if 25% Indexed $ .208 billion Would S.I066 be Consistent with Current Public Policy? Z _ 0o r_._ _ D'_ 1,4 _._ • Z 4J _m o _ _ _ SRB through a tax-qualified retirement plan? Most large employers coped with this problem by The views expressed in tnls statement are those 1. Indexation should not be mandated for reasons of both employer III 3. S.I066 _ _ o_would _ c: likely o cause -,_ limited {0 federal revenue deferrals beyond - permits employers to make the necessary increasing of the author the pensions and do not payable necessarily to reflect retirees the (as opposed _) _ _'- _) -_-I _ r_ I It cost is theandInstitute's federal revenue assessment loss.that S.I066 would be consistent with Under the calculation approach for "tax expenditures" used by the QUESTION: current practice and none beyond what is possible under current ANSk_R: contributions for the purchase of to those who were entitled to vested terminated _- views of _-the _C Empliyee ,-4c Benefit _ Research o May the SRB annuity be provided through a profit sharing law. Z co _J o_ -,4 :_ _1 _ 0 0 _ _ • c: Z supplemental _ _*'retirement _--_ benefits ,_,_o_ at, or Employer Institute, annuities its Trustees, purchased its mem outside oers, ora other tax-qualified benefits) through "ad hoc" adjustments, payable out plan? current Treasurypublic Department policy. the ultimate S.I066 would tax expenditure authorizewould a newbe approach significantly to doinglower what 2. Indexation should be encouraged to the degree that employers and W _ o,- _ _-,_ _ -- • _ • after, retirement; and, staff. plan on behalf of an employee result in immediate o of general corporate assets. Traditionally, these employees make the judgment that they wish to afford it. 4. S.I066 could improve economic security for those retired LLI • _ _ -_ --_ -,4 -,_ -_ _ _ _ 0 ,10 -,-.I 0 .,-4 .,-_ • ,-4 _ 4J -,q _1_ o taxation, to the employee, equal to the cash value of "ad hoc" payments had to be renewed on a year-to-year than this ANSWER: tax deferral amount of 208_Fllion dollars. Because some level of public policy already encourages -- postretiremenet indexation. Using other individuals receiving postretirement increases as a result of its a: _ _ _ _-- _, _ o o - permits employees to incur no tax basis the annuity. and were In increasingly contrast, an expensive employer and may administra- contribute ThisYes. bill Many under employers consideration use today, profit S.I066, sharingwould plans facilitate to supple- the I--- "'_ _" _ _ :_ passage. liability until amounts are distributed to the purchase of a nontransferable annuity on behalf ILl _ tively .u _ ¢burdensome. ) .u From a retiree's _ e,. viewpoint, ad hoc methods than those proposed by S.I066, indexation is already allowed by law on ment defined benefit plan benefits since the costs of I11 _ _ _ • 0 _ • 4_ -,-_ W _ oo _ m _ ,,,-,-_ t • • _ • ,--_ [n • @ • • • under the annuity. of a participant in a tax-qualified plan without causing payments were also unsatisfactory since, given the EE indexation of employer o pension benefits on a cost shared basis. Attachment 1 such plans can be more easily controlled. Often, to I-- 5. Greater o _ Cindexation _ of employer pensions ._ oo_ could increase long term I'-- I-- _ _ 0 m o _o _o_o a tax favored the basis participant (taxes are to recognize deferred ontax the contribution on the distribution cost until cO contingent H .,.q 4.) -_I nature of the payment, the retiree could *12 percent is used since the payment is made at the time of retirement. encourage employee savings, such plans provide for government flexibility with regard to Social Security and other CO Supplemental retirement benefits would be subject to the 0 until • he begins to receive payments under the annuity, not rely on either the increments granted to his 0 employee contributions which are then matched by employer 0 income transfer programs. n safeguards built into the d Internal Revenue Code and ERISA and then only to the extent of employer-derived amounts n pension in previous years or the employer's decision contributions. Under present law, employer contributions - as they apply to defined contribution plans. No attempt :: to actually increasereceived his or in hera pension given taxin year. responseFinally, to current the use - to profit sharing plans must be contingent upon the would be made to amend Title I of ERISA. "- inflation. EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, N\V Suite _bO \\ashington. [)_. 200_7 Telephone (202l (_59-0670 TXI83 TXI83[ _ -- 14 -- 66//24 24//82 82 TX183 - 2 - 6/24/82 TX!83 - 3 - 6/24/82