Federal tax law provides favorable tax treatment for various “qualified” retirement plans by deferring income tax on contributions made by workers. The Internal Revenue Code (IRC) limits the annual amount that workers can contribute to qualified plans. Executives at large corporations have another option for retirement savings that allows them to make far greater contributions thanks to loopholes in the IRC. A bill introduced in the U.S. Senate earlier this year, the CEO and Worker Pension Fairness Act (CWPFA), would close these loopholes, resulting in higher taxes for executives.
What Is an Executive Retirement Plan?
The term “executive retirement plan” refers to certain deferred compensation plans that are not “qualified” under the IRC. They are not eligible for deferred taxation in the same way as qualified plans like individual retirement accounts (IRAs) or 401(k) plans, but large corporations have found ways to take advantage of tax deferrals.
Workers with qualified retirement accounts have an annual limit on contributions. Tax deferrals on contributions to 401(k) plans, for example, are limited to $19,500 per year. Some executive retirement plans, however, may allow unlimited contributions. A report by the Government Accountability Office (GAO), entitled Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans, found that 2,300 corporate executives maintain around $13 billion in this type of account. Many of them contribute to these accounts after they reach their annual limit on qualified plan contributions.