Retirement & employee-benefits coverage The Wall Street Journal

Companies Tap Pension Plans To Fund Executive Benefits

Mon, 4 Aug 2008 00:03:15 -0400

Little-Known Move Uses Tax Break Meant For Rank and File

By ELLEN E. SCHULTZ and THEO FRANCIS

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.
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The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.

But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.

The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.

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The CEO Health Plan

Thu, 13 Apr 2006 00:14:40 -0400

In Era of Givebacks, Some Executives Get Free Coverage After They Retire

By ELLEN E. SCHULTZ and THEO FRANCIS

At a time when companies are scaling back health benefits for other retirees, former top executives at many corporations are receiving partial or full lifetime medical coverage on top of pensions valued at millions of dollars, a Wall Street Journal analysis of dozens of recent securities filings indicates.

The trend spans industries, and it is common at airlines, which have been among the most aggressive in scaling back retirement benefits for the rank and file. Continental Airlines, for example, provides health care "at no cost" for retired Chairman Gordon Bethune and his dependents, the company's proxy statement notes. That's in addition to other perks, including a lifetime of free flights and a decade of free office space, plus a lump-sum pension payout of $22 million. A Continental spokesman says other retired executives have to pay 20% of the cost of coverage but then declines further comment. Mr. Bethune, who retired on Dec. 31, 2004, didn't return calls to his office seeking comment.

Companies often provide their top executives with more generous health-care plans than other full-time employees get and then continue to provide the richer benefits through retirement. AT&T Inc. pays up to $100,000 per family per year for its top executives' out-of-pocket health-care costs through a separate insurance policy, and executives who joined the former SBC Corp. before 1999 get to keep that coverage in retirement. An AT&T spokeswoman says AT&T gives other retirees and employees "very good medical benefits" compared with other companies.

Citigroup Inc. promised to pay the premiums and out-of-pocket expenses for both health and dental care for Chairman Sanford I. Weill and his wife now, and it will continue to provide those benefits for the rest of the Weills' lives, the company's proxy statement says. Citigroup will also continue to pay for any taxes Mr. Weill owes on the imputed income arising from these benefits. A company spokeswoman says the benefit dates back to a 1980s contract and isn't available to other executives.

Companies are most likely to promise lifetime health benefits when hiring midcareer or older executives, especially if their prior employers offered similar perks, says Steven Hall, managing director of Steven Hall & Partners, an executive-compensation firm in New York. But Mr. Hall says it's often hard to tell what retiree health benefits companies offer their top managers. "You read the proxy and then scratch your head -- they didn't say they have it, but that doesn't mean they don't have it," Mr. Hall says.

The practice angers retirees who face rising health-care premiums and co-payments and, in many cases, are losing their retirement health benefits entirely. "Executives are receiving multimillion-dollar pensions and are in a position to easily pay for their health care," says Jane Banfield, a retired AT&T manager. "Instead, they want the icing on the cake by also guaranteeing themselves free health care," she says.

Amid the growing backlash against opulent executive-compensation packages, health-care benefits haven't yet attracted much attention from compensation watchdogs. One reason may be that current disclosure rules don't require companies to provide any details about special retiree health benefits for executives, even though they can cost a company more than the home-security systems, country-club memberships and other perks that are routinely disclosed in the footnotes of corporate proxy statements.

Under current accounting rules, the current and future cost of executives' health benefits in retirement are combined with the costs of benefits for other retirees, so it can be impossible to figure out how much a company is spending on top officers. Occasionally, a company breaks out a figure in a securities filing, providing a hint of what such coverage costs. During 2005, for example, PVC Container Corp. recorded charges of $140,000 "related to" the lifetime medical benefits it had promised a retired chief executive and his wife. A company executive confirms the details but declines to comment.

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How Lucent's Retiree Programs Cost It Zero, Even Yielded Profit

Mon, 29 Mar 2004 10:33:51 -0500

Trusts Paid the Tab -- Till Now;
Facing Need to Use Cash,
Company Imposes Cuts
A Handy Tool for Downsizing

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
March 29, 2004; Page A1

Henry Schacht, Lucent Technologies Inc.'s former chief executive and still a director, met with retirees in 10 states last fall to explain why Lucent was cutting their medical and life-insurance benefits.

In Buckhead, Ga., the retirees, some propped on canes and walkers, tottered into a meeting at the Sheraton hotel. Then, according to a handout from Mr. Schacht's presentation, he explained the burden Lucent faced from growing medical costs and rising numbers of retirees. There are now five retirees for every U.S. worker, the handout said. "Unfortunately, the numbers just don't work."

Many retirees say they resigned themselves to that conclusion. A high ratio of retirees and older workers, they figured, must be a burden that forced the company to cut benefits if it hoped to be competitive.

But an examination of Lucent's government filings shows that having a disproportionately high number of retirees hasn't been a problem for Lucent. In the first place, thanks to three benefit and pension funds that Lucent was born with when spun off from AT&T Corp. eight years ago, the big provider of telecom gear never had to dig into its own pocket to pay benefits for U.S. retirees. The funds paid every cent, both of pensions and of retirees' health care.

In addition, Lucent has been able to use assets in these funds to help it pay for repeated rounds of downsizing.

Moreover, the benefit plans -- thanks to accounting rules -- have fed Lucent hundreds of millions of dollars of income. And through a separate accounting maneuver, the cuts that Lucent made in the benefit plans last fall will contribute hundreds of millions of dollars more in income over future years.

In short, in most years the pension and retiree benefit plans have enhanced Lucent's earnings, not burdened them. But now that the surplus in the biggest fund is essentially gone, Lucent is faced with using some of its own cash to pay retiree benefits, and it is cutting those benefits.
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The Lucent story is a case study of the often-bewildering world of retiree benefits. Contrary to a common perception, having a high ratio of retirees to employees doesn't necessarily raise a company's benefits burden. Lucent also shows the sundry ways companies can actually profit from their retiree plans, both to relieve demands on their cash and to produce new income that burnishes the bottom line.

For many retirees, the impact is painful. "This is like getting an enormous pay cut -- in retirement," says Howard O'Neil, 90 years old, who began work in 1939 for Lucent predecessor Western Electric in the radar group, and then was a pricing specialist for AT&T Technologies. "We're going to have a really tough time this year," says the Wall, N.J., resident, now faced with paying for Medicare "part B" coverage and dental benefits that Lucent used to cover for him and his wife, Mabel, 79. Their total increase is $183 a month.

Lucent also eliminated a death benefit it had told Mr. O'Neil he would have. The benefit was to equal his $16,600 pay in his last year, 1973, and he intended it for his burial costs. "They punish you for being old," Mr. O'Neil says.

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How Cuts in Retiree Benefits Fatten Companies' Bottom Lines

Tue, 16 Mar 2004 23:20:11 -0500

Trimming a Health-Care Plan
Creates Accounting Gains,
Under Some Arcane Rules

A Shield Against Rising Costs

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
March 16, 2004; Page A1

The loud message comes from one company after another: Surging health-care costs for retired workers are creating a giant burden. So companies have been cutting health benefits for their retirees or requiring them to contribute more of the cost.

Time for a reality check: In fact, no matter how high health-care costs go, well over half of large American corporations face only limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will ever spend per retiree for health care. If health costs go above the caps, it's the retiree, not the company, who's responsible.

Yet numerous companies are cutting retirees' health benefits anyway. One possible factor: When companies cut these benefits, they create instant income. This isn't just the savings that come from not spending as much. Rather, thanks to complex accounting rules, the very act of cutting retirees' future health-care benefits lets companies reduce a liability and generate an immediate accounting gain.

In some cases it flows straight to the bottom line. More often it sits on the books like a cookie jar, from which a company takes a piece each year that helps it meet its earnings targets.

The art of minimizing retiree-benefit costs while creating income is arcane and poorly understood by the public -- and by the retirees. Here's a field guide to seven techniques.

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U.S. Drug Subsidy Benefits Employers

Thu, 8 Jan 2004 23:34:39 -0500

By ELLEN E. SCHULTZ and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
January 8, 2004

Some companies with many retired workers are expected to post big earnings gains for 2003 or 2004, thanks to accounting guidelines for subsidies under the federal prescription-drug program.

When Congress approved prescription-drug benefits for Medicare recipients last year, it granted benefits for the 65% of large employers with retiree health-care plans, providing funds for companies that maintained their prescription-drug coverage for retirees.

The program is supposed to encourage employers to retain prescription-drug coverage.

But companies are entitled to the subsidy regardless of how much of the cost they pick up themselves. As a result, it does nothing to halt the current rush by some employers to shift more costs to retirees.

In fact, benefits consultants are designing employer-sponsored prescription plans to save companies more money by unloading costs on their former workers without losing out on the new subsidy.

The subsidy won't be paid for another two years, but the Financial Accounting Standards Board of Norwalk, Conn., gave permission Wednesday for companies to book the value of their anticipated government payments in 2003 financial statements, if they believe they can accurately predict the effect of the subsidy.

Some of the biggest accounting gains are expected to show up at such companies as Lucent Technologies Inc., which has 240,000 retirees and dependents, General Motors Corp., Dow Chemical Co., and SBC Communications Inc. All are members of the Employers' Coalition on Medicare, which lobbied for the subsidy. Some of these companies won't take the gains immediately.

GM won't report the impact of the Medicare subsidy in its 2003 year-end results but will sometime later, said Toni Simonetti, a spokeswoman for the auto maker.

With roughly 440,000 retirees and dependents receiving health coverage, "our retiree medical expenses are going up despite the Medicare relief," she said.

A Dow Chemical spokeswoman said the company is still calculating the effect of the subsidy, which would be reflected in the year-end 2003 financial statement released on Jan. 29, but not on the income statement. The spokeswoman said the effect of the subsidy would be recognized as an actuarial gain over 10 to 15 years.

The new federal program calls for employers to be reimbursed for 28% of the cost for prescriptions of more than $250 per retiree, up to an annual subsidy of $1,330 per retiree, beginning in 2006. The subsidy will be significant at companies with thousands of retirees ages 65 or older, because prescription-drug costs make up a large part of the expenses that employers incur for seniors under their retiree medical plans.

Thanks to a little-noticed provision in the new law, the government will calculate the subsidy based on both what the employer spends for prescription drugs and what the retiree spends.

So if an employer and a retiree each pay $1,000 toward the retiree's medical costs, the employer's subsidy is calculated on the full $2,000, bringing the company a total subsidy of $490, rather than the $210 that it would get if it received a subsidy only on its share.

As a result, when combined with tax and accounting rules, the program allows employers in some cases to use the subsidy to erase the entire cost of prescription drugs for retirees, or even turn a profit from a drug plan. For instance, if a Medicare-eligible retiree's prescription costs are $2,550, and his former employer pays $1,000 of it, under long-standing tax rules, the employer can deduct its full $1,000 for tax purposes, meaning the after-tax cost to the company is $650 at a 35% corporate tax rate.

Meanwhile, the company doesn't pay taxes on the subsidy it receives, thanks to another provision of the new Medicare law. So in this example, the employer would receive a subsidy of $644, based on the full amount paid by both employer and retiree, reducing the company's cost for the retiree to $6 for the year.

"It's hard to believe that any of this was an accident or an oversight," said Rep. George Miller (D., Calif.).

Benefits consultants confirm they are working out the details necessary to structure drug-benefits programs to take advantage of this quirk in the legislation. If a company can hold its costs to 40% to 50% of each retiree's prescription costs, shifting the rest to the retirees, the subsidy means "there is virtually no cost to the employer in setting up a plan like that," said Mark Beilke, director of employee benefits research at benefits-consulting firm Milliman USA.

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