CLIENT ALERT: Companies Should Consider Making Additional Defined Benefit Plan Contributions for 2017 to Maximize Tax Benefits
In the aftermath of the recent enactment of the Tax Cuts and Jobs Act (the “Act”) and the reduction of the U.S. federal corporate income tax rate from 35 percent to 21 percent, a small window exists for a tax advantage for companies that sponsor defined benefit pension plans. As a result of the corporate income tax rate reduction, corporate income tax deductions for the 2017 taxable year are more valuable than deductions for the 2018 taxable year because each dollar of deduction offsets a higher income tax liability in 2017 than in 2018.
For most purposes, the 2017 taxable year has closed. However, any company that has filed an extension to file its income tax returns, contributions to its defined benefit retirement plan may be made until September 14, 2018 (for calendar year companies). As a result, a $1 million plan contribution made prior to September 14, 2018 can still count toward a company’s 2017 taxable year and will result in a $350,000 tax deduction. The value of the deduction falls to $210,000 for Plan contributions of the same size made under the Act for 2018 taxable year.
In addition, a company with an underfunded defined benefit pension plan faces higher insurance premiums from the Pension Benefit Guaranty Corporation (the “PBGC”), the agency that insures private-sector defined-benefit pension plans. The PBGC generally collects two types premiums: (i) a fixed fee for each person participating in a private-sector defined benefit pension plan; and (ii) a separate, variable rate premium for each dollar the plan is underfunded. Therefore, a company’s additional 2017 contributions can eliminate or reduce the amount of unfunded vested benefits of its plans thereby eliminating or reducing the amount of variable rate premium the company must pay in 2018. The 2017 variable rate premium is $34 per $1,000 of unfunded vested benefits (subject to a cap, which may be reduced for certain small employers). The 2018 variable rate penalty premium will increase to $38 per $1,000 of unfunded vested benefits and the 2019 variable rate penalty premium may potentially rise to $42 per $1,000 of unfunded vested benefits. Therefore, companies have an additional incentive to make additional contributions to underfunded defined benefit pension plans for their 2017 taxable year.
The Wall Street Journal has reported that several companies increased their voluntary plan contributions for 2017 to maximize tax deductions ahead of or as a result of the Act, including the issuance of debt to fund such increased contributions.
Due to the corporate income tax rate reduction for 2018 taxable years and rising variable rate penalty premiums, companies should consider making additional plan contributions for their respective 2017 taxable years.
If you have any questions regarding this topic or any other matter relating to your employee benefit plans, please contact the Olshan attorney with whom you regularly work or Stephen Ferszt.