Lawsuit Failed to Shed Light on New Pension Maneuver

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Some companies are moving obligations for executive benefits into rank-and-file pension plans in a move that allows them to immediately deduct contributions.

The Wall Street Journal reports that the practice is “a dubious use of tax law” that could drain assets from pension plans and make them more likely to fail. Yet such moves are often shrouded in secrecy, and a recent court case didn’t help shine a light on the practice.

Companies that donate money to pension plans cannot get the tax advantages if their plans discriminate in favor of highly compensated employees, the story explains. Companies that want to pay higher pensions to executives have to do so in a separate supplemental plan without the tax advantages. But some benefits firms are helping companies move pension obligations for the highly compensated employees into the pension plans for lower-compensated workers.

The consultants sometimes advise companies to limit the number of people who are told about the transfer. Usually only the executives learn about the change. A tipoff, though, is when lower-paid executives are given increased benefits to meet the nondiscrimination test.

One middle manager who wanted to learn more about a possible benefits shift was Joseph Gromala, who worked for insurer Royal & SunAlliance. Gromala learned he would be getting nearly $9 more a month at age 65. He asked for more information about higher amounts that others would receive and was denied the details.

Gromala sued claiming a breach of fiduciary duty because the company made the change to benefit certain key employees. The Cincinnati-based 6th U.S. Circuit Court of Appeals said in a 2004 unpublished decision that the benefits change was not a pension decision that was subject to the heightened fiduciary duty standard.

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