SPONSORED SECTION Photography by David Zentz
Corporate Tax Cut? Profit Repatriation?
Rising Interest Rates?
Will President Trump’s anticipated economic changes create
opportunities for DB plans?
Marty Menin (left)
and Russ Proctor
There is much debate in corporate boardrooms over the
effect the current administration’s economic policies will
have on corporate tax rates, possible repatriation of foreign
profits and interest rates. Considering all the talk about the
changing economic environment, PLANSPONSOR sat down
with Russ Proctor and Marty Menin of the Retirement
Solutions Division at Pacific Life to ask them whether these
developments will help defined benefit (DB) pension plans.
PLANSPONSOR: If corporate tax rates are reduced
significantly this year or next, how could this impact
pension plan sponsors?
Russ Proctor: Under the assumption that corporate tax
rates will get reduced, plan sponsors might consider accelerating the funding of their pension plans to take advantage
of the larger tax deduction before the lower tax rates are fully
effective. In some cases, the contribution could be made
after the end of the plan year and still deducted for that year.
For example, a company with a calendar year plan year may
be able to make a contribution as late as September 15 of the
following year and deduct it for the prior year’s tax return. If
a plan sponsor intends to make a contribution to the pension
plan in one of the next few years, it may make sense to do
that in a year when it can take a larger tax deduction.
PS: What if the new administration gives companies a
tax break on their offshore profits? Could they use those
repatriated profits to make pension contributions?
Marty Menin: There are many reasons a plan sponsor may
want to contribute available cash to its underfunded defined
benefit plan. These include the potentially larger tax deduction we just mentioned, as well as reducing PBGC [Pension
Benefit Guarantee Corporation] variable rate premiums. This
year, the PBGC premium is 3.4% of the unfunded pension
liability. Assuming average wages increase 3% per year, it
is projected to increase to 3.9% in 2018 and 4.4% in 20191.
If the plan sponsor can make a contribution to fully fund the
plan, it can reduce the impact of those large and increasing
variable rate premiums.
Some companies are considering “borrowing to fund.” If you
can borrow at an interest rate that is close to the PBGC variable premium rate, why not borrow the money and increase
the funded status of the plan? So, whether a company has
cash available, borrows the funds, or captures the funds
thanks to a foreign profit repatriation program, it should
review their options to deploy that cash, and that analysis
may include the possibility of fully funding the pension plan.
PS: What would a plan sponsor do then? Terminate the
pension plan? If suddenly you’ve made a huge contribu-
tion to your pension plan, what’s next?
Menin: That’s the key question: Once you’ve got a fully
funded pension plan, what do you do then? Unfortunately,
unless you’ve already filed for a plan termination, and filed
all the necessary paperwork with the PBGC and the IRS
[Internal Revenue Service], you can’t immediately terminate