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Wednesday, Might 11, 2022

Wiedenbeck & Stein: The Government Compensation Menace To Retirement

Peter J. Wiedenbeck (Washington College; Google Scholar) & Norman P. Stein (Drexel), The Government Compensation Menace to Retirement:

Lately a brand new phenomenon has appeared on the retirement financial savings panorama: the enlargement into center administration ranks of a conventional device of govt compensation, the so-called “high hat” pension plan. High hat plans are unfunded deferred compensation applications for a “choose group of administration or extremely compensated workers.” Correctly structured, high hat plans amass retirement sources which might be taxed to employee-participants solely when distributed. From the participant’s viewpoint, that delayed inclusion seems similar to the tax deferral accorded certified retirement plan financial savings, but high hat plans are exempt from the entire Code’s qualification circumstances. They’re likewise excused from just about all of ERISA’s pension plan participant protections, together with vesting, funding, and fiduciary duties.

This regulatory immunity licenses three interconnected pathologies that undermine core retirement coverage aims. The inapplicability of ERISA’s employee protections, mixed with preemption of state legislation, relegates high hat plan members to a uniquely precarious place: their retirement financial savings are extra uncovered to depredation and weak to loss than if ERISA had by no means been enacted. The inapplicability of the Code’s certified plan nondiscrimination necessities permits employers to supply further retirement financial savings to highly-paid managerial, technical, {and professional} workers with out having to pay comparable advantages to rank-and-file staff. And the dramatic disparity, post-2017, between earnings tax charges relevant to firms and high-income people incentivizes that favoritism with a considerable tax subsidy that’s unmeasured and usually missed.

This text explores the unresolved ambiguity that has enabled high hat plan metastasis into upper-middle compensation ranges. It paperwork the sources of the pathologies related to the enlargement of high hat pensions and traces their penalties. And it surveys the main responses to those developments, a few of which supply solely partial options, whereas others may very well be completed solely by laws.

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