A lawsuit against PricewaterhouseCoopers LLC suggests loopholes exist in pension-related tax regulation that could benefit some employers at the expense of rank-and-file employees and taxpayers.
The suit alleges PwC executives designed complicated cash balance and 401(k) plans to allow partners to sock away unusually large amounts of retirement savings while providing minimal benefits to other employees.
Regardless of the outcome of the lawsuit, the Internal Revenue Service and Department of Labor must determine if such complicated plans are being used by other employers to take advantage of loopholes in tax law and ERISA.
If they find even a few plans are, in effect, gaming the laws and regulations, they must seek congressional help in closing the loopholes.
The lawsuit alleges the PwC cash balance plan defines normal retirement age as any age after five years of service. Among other benefits, that provision allegedly allows partners to collect their retirement benefits and roll them over into individual retirement accounts, while continuing to work because federal pension law allows workers past normal retirement age to receive such benefits and continue working.
The structure of the plan, the suit alleges, also allowed the company to guarantee partners pensions equal to the maximum allowed under tax law, $170,000 a year in 2005.
The PwC 401(k) plan, the lawsuit alleges, allowed new employees to participate only in the last month of the company's fiscal year, and provided a 200% match for new employees but only during their first month of participation. This guaranteed, the suit alleges, a high participation rate by rank-and-file employees allowing partners to contribute the maximum to the plan, while permitting the plan to pay them the high matching contribution and still pass the non-discrimination test.
The IRS has proposed regulations that would end such practices, prohibiting a normal retirement age that is earlier than "is reasonably representative of a typical retirement age for the covered work force."
But the IRS might not have the authority to make such a change without legislation, and employers might challenge it.
Employers should not be able to use loopholes in tax and pension regulations to enable executives and other senior employees to shelter large amounts of income from taxes, and generate higher pensions, through complex plan designs that make it difficult for other employees to take advantage of the same benefits.
Companies already have other means to provide rewards for top employees: through higher pay and bonuses.
Employers must provide genuine retirement benefits for all employees if they wish to provide them to top executives. The Labor Department, the IRS, and the Congress, if necessary, must make sure the rules governing retirement plans are clear, unambiguous and fair to all employees.
Loopholes that may allow such plans to be distorted in favor of highly paid executives and partners must be changed.