Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans
Released: 2020-02-27T00:00:00

Letter

Background

Executive Retirement Plans

Companies that offer executive retirement plans typically do so to supplement benefits provided under qualified retirement plans or to provide retirement benefits in lieu of a qualified retirement plan. In an executive retirement plan, a select group of managers or highly compensated employees defer the receipt of compensation earned in one year to be paid in a future year, generally at or after retirement. Executive retirement plans are not subject to certain statutory limits that apply to qualified retirement plans, such as limits on the annual amount of benefits received, the annual amount of contributions made to the plan, or the annual compensation level used to determine benefits and contributions.

Executive retirement plans can be structured as defined benefit plans or defined contribution plans but generally must defer compensation to a future year. For executive retirement plans structured as a defined contribution plan, executives’ benefits are based on a plan account balance. During the deferral period, companies will typically allow executives to select from among a menu of market indices (e.g., of stock, or bond performance or of interest rates) or other investment options and base the plan account balance on the performance of those selections. The company generally credits plan contributions and changes in the value of the plan account balance to executives, but does not have to make actual investments that correspond to executives’ selections because companies are not obligated to designate funds for the plan before distributions are made. For executive retirement plans structured as a defined benefit plan, executives are typically paid based on a formula that accounts for salary and years of employment. Distributions from all executive retirement plans are made from company assets. In the first objective of this report, we discuss and illustrate the defined contribution form of executive retirement plans, except as otherwise indicated.

Employee Retirement Income Security Act of 1974

ERISA contains various provisions intended to protect the interests of plan participants and beneficiaries in workplace retirement plans. These protections include requirements related to reporting and disclosure, participation, vesting, and benefit accrual, as well as plan funding.

Generally, most of the substantive protections of ERISA do not apply to executive retirement plans. Specifically, ERISA requirements pertaining to participation, vesting, funding, and fiduciary responsibilities do not apply to executive retirement plans. The policy underlying the executive retirement plan exemption from the substantive provisions of ERISA has been described by DOL as based on a recognition by Congress that “certain individuals, by virtue of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan.”

Additionally, ERISA grants DOL the authority to prescribe alternative methods of compliance for the reporting and disclosure provisions under Part 1 of Title I for any plan or class of plans, which includes executive retirement plans. Using this authority, DOL issued a regulation permitting administrators of executive retirement plans to submit a one- time single page filing statement to satisfy ERISA reporting requirements in 1975, according to DOL. DOL’s executive retirement plan filing statement includes: the name and address of the employer, the employer identification number (EIN) assigned by the IRS, a declaration that the employer maintains a plan or plans primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, and a statement of the number of such plans and the number of employees in each plan.

In addition, plan administrators are required to provide plan documents to DOL upon request.

The Internal Revenue Code and Tax Treatment of Executive Retirement Plans

The Internal Revenue Code (IRC) provides preferential tax treatment for workplace retirement plans that meet certain qualification requirements set out in the IRC. The structure of tax incentives and certain limits on qualified retirement plans are intended to balance encouraging employers to establish and maintain voluntary, tax-qualified pension plans with ensuring lower-income employees receive an equitable share of the tax-subsidized benefits. Although executives may benefit from tax deferral under an executive retirement plan, these plans are not eligible for the same preferential tax treatment afforded to qualified retirement plans under the IRC. For the executive to be eligible for the tax deferral, executive retirement plans must be an “unfunded and unsecured” company promise to pay benefits in the future. Generally, for an executive retirement plan to be considered unfunded and unsecured, the executive’s rights to receive plan distributions will be no greater than the rights of an general unsecured creditor in the event of company bankruptcy or insolvency. Companies are not permitted to fund (i.e., set aside assets for the exclusive benefit of participants that are separate from company assets and beyond the reach of creditors) executive retirement plans while maintaining the benefits of tax-deferral for executives. However, companies are able to “informally fund” executive retirement plans by transferring amounts to a trust that remains part of the company’s general assets—often referred to as a “Rabbi Trust”—to help keep its promise to pay benefits. Because executive retirement plans are unfunded, executives’ benefits in these plans can be subject to credit risk of non-payment, such as in the event of a company bankruptcy, according to IRS officials.

The IRC provides rules regarding deferring compensation in executive retirement plans, including restrictions on the timing of distributions, restrictions on payment acceleration, and restrictions on the timing of deferral elections. At the time of deferral, the amount of compensation deferred under the plan is generally excluded from executives’ income for tax purposes and not tax deductible for the company (see fig. 1). During the deferral period, because any assets associated with the executive retirement plan remain company assets (and subject to creditor claims), the company is subject to applicable taxes on any investment earnings attributable to the assets. Executives are subject to federal income taxes on their executive retirement plan distributions when they are received. However, if an executive retirement plan fails to meet the applicable requirements at any time during a taxable year, all of the compensation deferred, including investment earnings associated with the deferred compensation, is included in each executive’s gross income for the taxable year to the extent it is vested, along with an additional 20 percent tax on the compensation to be included in gross income plus additional income tax. Companies must defer taking their tax deductions, up to statutory limits, for plan contributions they make until the executive is taxed on those benefits.

Additional Federal Regulatory Oversight

In addition to DOL’s role under ERISA and IRS’s role administering the IRC requirements related to executive retirement plans, other federal agencies may have roles related to executive retirement plans. For example, SEC requires public companies to provide an annual proxy statement that includes information on the amount and type of executive compensation—including benefits from executive retirement plans—paid to their Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the next three most highly compensated executive officers.

Other federal agencies that play a role with respect to qualified retirement plans, such as the PBGC, may monitor the status of executive retirement plans in certain circumstances, such as in bankruptcy proceedings involving a company with both an executive retirement plan and a qualified single-employer defined benefit plan (see table 1).

Most Large Public Companies Provide Their Top Executives with Executive Retirement Plans but the Federal Revenue Effects of these Plans Are Unknown

Most Large Public Companies Provide Top Executives with Executive Retirement Plans

According to our analysis, more than 400 of the 500 largest U.S. public companies provided executive retirement plans to almost 2,300 top executives, totaling about $13 billion in accumulated plan benefits in 2017 (see fig. 2). Although DOL collects limited data on the prevalence of executive retirement plans, public companies subject to SEC reporting requirements for executive retirement plans must report the benefits provided to the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the next three most highly compensated executive officers. Industry experts we interviewed said that most large companies offer executive retirement plans to help executives and highly compensated employees save more for retirement because most executives have reached the contribution and income limits imposed on savings in qualified retirement plans.

Executive Retirement Plan Benefits Are Concentrated Among a Subset of Top Executives

Top executives at large public companies generally accumulated more executive retirement plan benefits than top executives at smaller companies. The most recent available data from 2017 show that the average accumulated plan benefit among the top five executives in large companies was about $5.7 million, about twice as much as their counterparts in smaller companies, where the average was about $2.8 million. The average and median accumulated plan benefits generally remained consistent for large and smaller companies from 2013 to 2017 (see fig. 3).

In addition, our analysis showed that, among the top five executives at large public companies, accumulated plan benefits are concentrated among a subset of these top executives based on their job title, company contributions, and plan type. The average accumulated plan benefit among top executives in large companies was consistently greater than the median accumulated plan benefit from 2013 to 2017 (see fig. 3). For example, as of 2017, the average accumulated plan benefit among top executives was more than four times the median, indicating that plan benefits for a smaller subset of executives is greater than a majority of other individual executives.

Total Accumulated Plan Benefits by Title

CEOs accumulated more executive retirement plan benefits than the next four highest compensated executives. As of 2017, the CEOs had accumulated, on average, about $14 million in executive retirement plan benefits. In contrast, CFOs had accumulated, on average, about $3 million and the next three most highly compensated executive officers with other titles accumulated an average of about $3.4 million in accumulated plan benefits. Our analysis also showed that, for each of the three job title categories (CEO, CFO, and the next three most highly compensated executive officers), the average accumulated plan benefits were at least twice the median amount from 2013 to 2017 (see fig. 4).

Plans with Company Contributions

From 2013 to 2017, about 80 percent of large companies that offered an executive retirement plan made company contributions to the plan. As of 2017, the average accumulated plan benefit for top executives among companies providing company contributions was more than $6.5 million. This was more than twice the average of nearly $2 million for executives in about 20 percent of the remaining companies that offered an executive retirement plan that did not include company contributions. Our analysis showed that plan benefits are also concentrated among a subset of executives as the average amount of accumulated plan benefits for executives in plans that received company contributions were several times greater than the median from 2013 to 2017 (see fig. 5).

Executives with Defined Benefit Plans

The top five executives with defined benefit executive retirement plans generally accumulated more plan benefits than those with defined contribution executive retirement plans alone. As of 2017, about 30 percent of large companies that sponsored an executive retirement plan offered a defined benefit plan, as compared with about 70 percent that only offered a defined contribution plan. In 2017, the top five executives at large companies with a defined benefit plan had accumulated plan benefits of nearly $9 million on average, more than twice the average of about $4.4 million for top five executives with defined contribution executive retirement plans alone. Our analysis showed that plan benefits are concentrated among a subset of executives as the average accumulated plan benefits for top five executives with a defined benefit plan was several times more than the median from 2013 to 2017 (see fig. 6). However, industry experts told us the number of companies offering defined benefit executive retirement plans has declined over time.

Executive Retirement Plans Can Offer Executives Tax, Savings, and Financial Planning Advantages

Executive retirement plans can help executives reduce their potential tax liability, increase retirement savings, and provide financial planning advantages through: (1) tax substitution of investment earnings, (2) additional company compensation for investment earnings, (3) additional company compensation for personal income taxes, and (4) allowable distributions during working years.

Tax Substitution of Investment Earnings

Treasury officials and some industry experts told us that executives who participate in executive retirement plans may be able to reduce their potential federal tax liability on plan investment earnings and increase their savings because these plans substitute the executive’s applicable individual tax rate on investment earnings with the company’s corporate tax rate (see fig. 7).

In an executive retirement plan, the company defers compensation for the executive, but investment earnings on associated assets during the deferral period are taxed to the company at the company’s applicable corporate tax rate (see “Executive defers compensation” at top of fig. 7). In contrast, the executive who chooses not to defer compensation and instead takes the current compensation (paying income taxes) and invests the balance will pay taxes on investment earnings at the individual tax rate (see “Executive does not defer compensation” at bottom of fig. 7). The actual taxes paid under either scenario—deferring compensation or not—will depend on a number of factors, including the type of investments, if any, selected by the executive or the company, length of time invested, and applicable tax rates. For example, an executive who does not defer compensation and invests outside of the plan might select investments that are expected to produce long-term capital gains, which are taxed at lower individual rates than short-term capital gains. This same executive, if deferring compensation through the plan, might elect to invest in short-term bonds or investment earnings based on a market interest rate, which are taxed at a lower corporate tax rate inside the plan than outside. As another example, a company might invest deferred compensation in a tax-favored vehicle such as corporate- owned life insurance.

According to Treasury officials and some industry experts, by participating in an executive retirement plan, executives may be able to effectively reduce their potential federal income tax liability during the deferral period because investment earnings on associated plan assets are taxed at the company’s corporate rate that may be lower than the executive’s individual tax rate. This tax substitution of investment earnings may allow the plan account to grow over time at a higher rate of investment return than if an executive invested in the same or similar assets outside the plan. Further, any such tax advantages may allow companies to reduce their total compensation costs. Conversely, Treasury officials told us the IRC may effectively disadvantage executive retirement plans to the extent the tax on an executive’s investment earnings outside the plan is lower than the tax the company would pay if invested through the plan. In this circumstance, the tax disadvantage may increase the cost of companies’ total compensation. However, our analysis of tax rates suggests that the corporate tax rate may be lower than the individual tax rate on several forms of investment income. In this case, the company may be able to achieve a higher after-tax rate of return on investments than the executive can, depending on the type of investment and amount of time invested. The lower the applicable corporate tax rate is relative to the applicable individual tax rate, the greater the tax benefit for the executive or the company. Treasury officials and some industry experts told us that, in this scenario, the potential tax advantage resulting from tax substitution of investment earnings is effectively a federal subsidy because the federal government receives less in tax revenue. And due to the effects of compounding, the tax advantage is also greater the longer the deferral period (and higher the investment return).

Treasury officials and experts whose published work we reviewed and interviewed told us the potential effective federal tax subsidy for executive retirement plan investment earnings can be greater when companies have effective tax rates that are lower than statutory tax rates. This can occur, for example, when a company’s losses from the current year or losses carried over from prior years offset all other company income, including any investment earnings associated with their executive retirement plan. In these instances, the federal government could effectively subsidize the plan investment earnings because it receives no taxes on those earnings until funds are distributed.

Additional Compensation for Investment Earnings

Companies also provide executives with additional executive retirement plan compensation that increases their overall savings by not passing along taxes paid on investment earnings during the deferral period, according to Treasury officials and some industry experts. In this scenario, a company’s assets associated with the executive retirement plan are reduced for taxes it pays on investment earnings, but the executive’s corresponding plan account balance is unaffected by tax because the company provides the executive with additional plan compensation in the same amount as the taxes the company pays. Unaffected by taxation on investment earnings, the account balance accumulates over time at a pre-tax investment rate of return, rather than at the company’s potentially lower after-tax investment rate of return, until those funds are distributed to the executive. In this manner, this additional compensation provided by the company allows the account balance of an executive retirement plan to accumulate in the same way as in a qualified defined contribution retirement plan (e.g., a 401(k) plan). The additional compensation can result in a substantial benefit for an executive, and due to the effects of compounding, the benefit is greater the longer the deferral period (and higher the investment return).

Additional Compensation for Personal Income Taxes

Lastly, industry experts said some companies provide additional executive retirement compensation to pay for the personal income taxes that executives expect to pay when plan benefits are distributed. This practice is known as a tax “gross-up” because the company increases the amount of gross or pre-tax executive retirement plan benefits to pay for the executive’s anticipated income taxes at distribution. As a result, the executive effectively receives the total amount of the initial pre-tax benefit at distribution. For example, a company that wants an executive who is in the 37 percent income tax bracket to receive $1,000 from the plan on an after-tax basis would provide an additional $588 in plan compensation (for a total of $1588) to cover the executive’s anticipated taxes at distribution.

Treasury officials said that while tax gross ups and other similar executive compensation practices provide an economic benefit to executives, these practices by companies to offset executives’ tax burden is a corporate governance issue for shareholders to decide and that tax law does not address their appropriateness. Some industry experts told us that it has become less common for public companies to offer tax gross-ups, mostly due to shareholder concerns about their appropriateness in light of required public disclosures.

Plan Distributions during Working Years

Executive retirement plans can also provide executives with financial planning benefits through allowable distributions during their working years. Treasury officials and industry experts said that while executive retirement plans are intended for retirement purposes, plans typically also allow executives to take distributions while still working. These distributions generally are allowed if they comply with applicable statutory requirements. Industry experts told us that executives can align distributions during their working years with income needs, such as to pay for a child’s college expense, or for specific goals, such as buying a home. Industry experts said that the ability to structure pre-retirement distributions can allow executives to smooth out their overall income over time to better coordinate use of other income sources during their working years and retirement, which they said can lead to overall tax savings.

Federal Revenue Effects of Executive Retirement Plans Are Unknown

Executive retirement plans can provide tax advantages that may have revenue effects for the federal government, but the extent of those effects currently is unknown. Treasury is responsible for providing economic analysis and revenue estimates of tax legislation for the executive branch, and Treasury officials said that the Congressional Joint Committee on Taxation prepares official revenue estimates of all tax legislation considered by the Congress. Treasury officials told us that while executive retirement plans do not receive the preferential tax treatment afforded to qualified retirement plans, these arrangements can result in tax advantages that may have revenue effects for the federal government. These officials explained that executive retirement plans are tax revenue neutral when corporate tax rates and individual tax rates (or taxes paid) are the same because the federal government would generally receive the same amount of taxes regardless of the executive’s decision to defer compensation. Treasury officials also told us that executive retirement plans could have federal revenue effects to the extent corporate and individual tax rates (or taxes paid) diverge from each other.

Bankruptcies Reviewed Resulted in Various Expected Outcomes for Executive Retirement Plan Benefits

Executive Retirement Plan Participants’ Expected Benefit Losses and Recoveries Varied Across Company Bankruptcies Reviewed

Among the 38 Chapter 11 corporate bankruptcy cases we reviewed, 30 cases showed that participants in executive retirement plans expected to receive general unsecured creditor status when settling their plan benefit claims. As a general unsecured creditor, executives in these plans are part of what is typically the last creditor class to be paid in bankruptcy, and only if funds remain after claims from all other creditors with payment priority have been paid in full (see fig. 8).

Our review of bankruptcy cases showed that executives’ expected losses and recoveries varied among the 30 Chapter 11 cases we reviewed where all or some plan participants were expected to receive general unsecured creditor status for their plan benefit claims (see fig. 9). In 21 of the 30 cases, plan participants were expected to sustain losses of more than 75 percent of their plan benefit claims, and in 17 of these 21 cases, participants were estimated to lose 90 percent or more. However, the remaining nine cases showed that participants were expected to recover more than half of their plan benefit claims with six of those cases expecting a full recovery and one case expecting a 99 percent recovery.

Companies generally file for bankruptcy when they do not have sufficient assets to pay off their debts. Bankruptcy and industry experts said that executive retirement plan participants as general unsecured creditors may expect to sustain a significant or even a total loss of their deferred compensation in a company bankruptcy. However, bankruptcy and industry experts noted that the level of losses or recoveries depends on the facts and circumstances of each case, including the type of bankruptcy the company filed.

Our review of bankruptcy cases showed differences in expected benefit losses and recoveries based on whether the bankrupt company intended to continue to operate by filing a reorganization plan or sell all of its assets to pay creditors by filing a liquidation plan. Among the 30 Chapter 11 bankruptcy cases where participants in executive retirement plans were expected to receive general unsecured creditor status, 14 filed a reorganization plan and 16 filed a liquidation plan.

Reorganization

Among the bankruptcy cases we reviewed, executives were generally estimated to sustain less severe claims losses and recover more of their plan benefits if their company filed a reorganization plan to continue to operate and restructure its debts. In seven of 14 reorganization cases we reviewed, executive retirement plan participants were estimated to recover about 80 percent or more of their plan benefit claims, with participants in six of those cases expected to fully recover their benefits. In contrast, participants in the remaining seven of 14 cases were estimated to sustain benefit claims losses of about 20 percent or more, with participants in five cases expected to lose 90 percent or more. Industry experts told us plan participants are more likely to sustain fewer losses when their bankrupt company reorganizes because it has a plan to emerge from bankruptcy and pay its debts as it continues to operate. Bankruptcy and industry experts noted that in some reorganization cases, general unsecured creditors can receive full recoveries.

Liquidation

Executives were generally estimated to sustain greater plan benefit claim losses if their company filed a liquidation plan. In 15 of 16 liquidation cases we reviewed, executive retirement plan participants were estimated to sustain losses of nearly 50 percent or more of their plan benefit claims. Participants in the remaining case were expected to nearly fully recover their benefits. Industry experts told us that whether a company has a viable post-bankruptcy future affects its ability to fulfill its debt obligations, including paying promised plan benefits to executive retirement plan participants. Bankruptcy experts said the severity of plan benefit claims losses for participants is generally greater when a bankrupt company liquidates because it signals the end of a company and is a last resort after it has exhausted all other options to restructure its debts and continue to operate.

Executive Retirement Plan Benefits Were Expected to be Maintained in Some Bankruptcies Reviewed Where Participants Were Not Expected to Receive General Unsecured Creditor Status

Among the 38 Chapter 11 bankruptcy cases we reviewed, 11 involved the situation where all or some of the executive retirement plan participants were not expected to receive general unsecured creditor status for their benefit claims. Although the circumstances varied among these 11 cases, the expected outcome was that some of these participants’ plan benefits which were accrued at or around the time the company filed for bankruptcy were expected to be preserved or paid.

Reorganization

Among the 11 cases we reviewed in which executive retirement plan benefits were expected to be maintained, eight occurred with a bankrupt company that filed a reorganization plan. In three of the eight cases, benefits for all plan participants were expected to be preserved; in five cases participants were divided into different groups where some were expected to have their benefits preserved and others were not.

Bankruptcy and industry experts said that, paying plan benefit claims in a bankruptcy often depends on the financial health of the company and the value of the executive to the future of the company. These experts also said that not all executive retirement plan participants receive the same treatment for their claims. These experts added that a common scenario is to preserve in some manner the benefits for key executives who are retained, while giving executives who are not retained, or former executives no longer with the company, less favorable treatment as a general unsecured creditor. Industry experts also told us that some executive retirement plan participants’ benefits may be preserved or the participants may be provided with more favorable treatment because they are key executives who need to be retained to help ensure their company successfully reorganizes and emerges from bankruptcy. These experts explained that key executives may not be willing to risk staying on without assurances that accrued plan benefits will be preserved or made up in some manner. Bankruptcy and industry experts said that because key high-level executives can be integral to the success of a company reorganization, its major creditors are more likely to agree to preserve plan benefits for them because it will likely result in increased overall recoveries and greater benefits for their stake in the company.

Lastly, bankruptcy and industry experts said that in order for bankrupt companies to retain key executives, they typically need to provide assurances that, in addition to executive retirement plan benefits, executives will receive other forms of compensation. Bankruptcy and industry experts noted that because various forms of executive compensation may be interchangeable to the executive, informal agreements may be arranged so that executive retirement plan benefit losses that may occur as a general unsecured creditor are made-up through other forms of compensation. However, they told us these types of arrangements are not discernable from bankruptcy filings.

Liquidation

In three of the 11 cases we reviewed in which executive retirement plan benefits were expected to be preserved, the companies filed a Chapter 11 liquidation plan. Court filings indicated executive retirement plan participants in two of the three cases received distributions shortly before the company filed bankruptcy. In one case, the bankruptcy estate chose not to seek to recover those funds despite restrictions for early distributions before a bankruptcy in part because the costs to recover the monies outweighed the benefits. Bankruptcy and industry experts said that while there are restrictions and penalties for early distributions before a bankruptcy, the costs and time associated with suing to recover monies can discourage bankruptcy estates from pursuing legal action.

Opportunities Exist to Strengthen Agency Oversight Efforts to Protect Benefits and Prevent Ineligible Employees from Participating in Executive Retirement Plans

IRS Provides Little Oversight of Companies with Executive Retirement Plans during a Restricted Period

IRS oversees executive retirement plans for compliance with the IRC during audits of companies who offer such plans. The Pension Protection Act of 2006 amended the IRC to provide that, during a restricted period, which includes bankruptcy, if a company that sponsors a qualified single- employer defined benefit plan sets aside or reserves assets in a trust for the purposes of paying nonqualified deferred compensation (which includes executive retirement plan compensation) to applicable covered employees (key executives), the key executives are required to include the amount of assets in their gross income for the taxable year. A restricted period is defined as: (1) any period in which the plan sponsor is a debtor in bankruptcy; (2) any period when the qualified single-employer defined benefit plan of the company is in at-risk status; or (3) the 12- month period that begins 6 months before the date the qualified single- employer defined benefit plan is terminated if, as of the termination date, the plan’s assets are not sufficient to cover benefit liabilities. In general, a company’s qualified single-employer defined benefit plan is in at-risk status if it is less than 80 percent funded.

As part of its oversight effort, IRS officials said that its examiners can use IRS’s Nonqualified Deferred Compensation Audit Techniques Guide (the guide) to audit these plans for compliance with the IRC, including the relevant provision, which was added by the Pension Protection Act of 2006. The guide describes the requirements in section 409A of the IRC related to deferred compensation set aside during a restricted period. While the guide is designed to provide guidance for IRS employees, the guide is publicly available and also useful for businesses and tax professionals who prepare returns. However, the guide does not instruct examiners or other users on how to determine compliance with the relevant provision. For example, the guide does not instruct examiners or other users to determine if the company has set aside assets—such as by making contributions of funds to a Rabbi Trust—to pay deferred compensation during bankruptcy. It also does not require examiners or other users to obtain data sufficient to determine whether there exists a restricted period with respect to the company’s qualified single-employer defined benefit plan. Lastly, it does not provide instructions regarding the type of data to collect or questions to ask to determine whether a company’s defined benefit plan is in a restricted period. When asked if additional instructions were available to examiners on auditing companies with these plans for compliance with the relevant provision, IRS officials pointed us to sections of the Internal Revenue Manual (IRM), IRS’s primary source of instructions to staff, and other internal training manuals. However, we found no specific instructions in these sources related to the relevant IRC provision or its oversight.

IRS officials said examiners can also review SEC filings to determine whether there exists a restricted period with respect to a company’s qualified single-employer defined benefit plan. However, SEC filing requirements do not apply to many privately-held companies, limiting the usefulness of this information source for IRS audit examiners for this purpose. IRS officials also said that Form 5500, Annual Return/Report of Employee Benefit Plan, and the attached schedules are available on the DOL website and that examiners can download and review these data during their examinations. For example, officials said information on the 5500 Form’s Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information, can be used to verify the income tax deduction for contributions to pension plans. Specifically, the schedule’s Item 4 box, Part I Basic Information, will be marked if the plan is in at-risk status. The form, however, does not capture whether companies set aside assets for the purpose of paying deferred compensation or elicit information about a company’s bankruptcy. Moreover, the IRM, the guide, and the IRS training manuals provide no instruction to examiners regarding how to review this information during audits of companies with executive retirement plans.

IRS also may be able to use non-confidential information that PBGC collects to monitor the financial condition of companies that sponsor single-employer defined benefit plans. In its capacity to provide plan termination insurance, PBGC monitors single-employer defined benefit plans—including companies’ financial condition and plans’ at-risk status— through a variety of reporting requirements and initiatives. For example, because PBGC represents itself and the pension plan and participants as a creditor when companies (publicly and privately-held) sponsoring single-employer defined benefit plans file for bankruptcy, it is aware of such bankruptcy filings. PBGC also uses data that companies are required to report on Form 5500, describing the assets and liabilities of their single-employer defined benefit plans, to identify when a defined benefit plan is underfunded or in at-risk status. IRS may be able to use the timely, non-confidential information PBGC possesses to help IRS identify whether companies with single-employer defined benefit plans are setting aside assets for the purpose of paying deferred compensation under an executive retirement plan during a restricted period.

Federal standards for internal control require federal agencies to obtain and use quality information and to communicate this information to internal and external parties that can help the agency achieve its objectives and address related risks. Without providing specific instruction to its examiners to collect and evaluate information that describes company actions relative to this requirement limiting tax deferral for key executives for amounts deferred under an executive retirement plan and set aside by the company during a restricted period, IRS cannot sufficiently determine if companies are including these amounts in the executives’ gross income as required by the IRC provision. Without taking steps to improve the sufficiency of its audit instructions to help strengthen its oversight, IRS cannot know if companies are reporting the correct amount of income for taxation for these key executives and if the correct amount of tax is being paid by the executives in these instances. IRS also may not be collecting additional taxes and interest due from key executives who participate in executive retirement plans. Absent improved IRS oversight in this area, companies may be failing to report assets set aside to pay deferred compensation to key executives while in a restricted period as income for these employees. To the extent some companies are failing to report this income, they may continue to do so at the cost of foregone federal tax revenues while lacking an important incentive from IRS to cease this practice.

Required DOL Reporting on Executive Retirement Plans Does Not Include Complete and Timely Data on Employee Participation

Another aspect of executive retirement plan oversight is ensuring that only eligible executives are allowed to participate since these plans are excluded from most of ERISA’s substantive protections. DOL requires companies to report on their executive retirement plans, but the reporting lacks important information that could allow the agency to identify plans that may be including ineligible employees. Currently, under its alternative reporting method regulation, DOL regulations require the administrator of the executive retirement plan, typically the sponsoring company, to submit a one-time single page filing statement within 120 days of the executive retirement plan being established to satisfy ERISA reporting requirements (see fig. 10). According to DOL officials, no other filings are required for executive retirement plans to comply with Part 1 of Title I of ERISA.

The information provided in the filing statement does not describe the job title or salary of executives participating in the plan, the percentage of the company’s workforce that is eligible to participate, or the actual percentage of employees who participate in the plan; nor does it compare the salaries of executives with rank-and-file workers. Because DOL only requires companies to submit the filing statement once within 120 days of plan formation, the agency is not aware when participation in the plan changes over time or if plans are terminated.

When asked if these additional data would be useful to the agency, one DOL official said that they could be used to increase oversight of executive retirement plans. For example, the official said if the filing statement included the percentage of the company’s workforce that participated in such a plan, a high participation percentage could signal to DOL that the company might be permitting employees to participate in the plan who do not meet the “select group” requirements, and that such information could prompt a DOL audit. However, the DOL official said the agency would need to evaluate how the data would be used and the collection costs before determining the data’s overall value. The preamble to DOL’s regulation states that the agency chose to require limited reporting because these plans are for executives who generally have access to information concerning their rights and obligations under the plan and do not need ERISA protections. Moreover, DOL officials said there is no statutory requirement specifically directing the agency to collect executive retirement plan data and no requirement for companies to file an amended filing statement to report substantive plan changes. However, ERISA authorized DOL to prescribe an alternative method of reporting and the agency chose to require a limited one-time single page filing statement for executive retirement plans.

DOL officials said the data currently collected can only be used for simple analysis or to facilitate the agency’s ability to respond to requests from Congress, the media, or the public. This limited usefulness regarding eligibility is due to the age and limits of the original data submitted. However, officials told us there currently is no plan to place executive retirement plan reporting on DOL’s regulatory project agenda. Federal standards for internal control state that agencies should (a) use quality information to achieve its objectives; (b) obtain data from reliable sources in a timely manner based on identified information requirements; and (c) process the data into quality information—information that is appropriate, current, complete, accurate, accessible, and timely—to support its internal control system. Without reviewing or clarifying its reporting requirements to allow the agency to collect more useful information on executive retirement plans, DOL will continue to lack insight into the composition of these plans and, as a result, may be missing opportunities to ensure that companies with executive retirement plans are meeting the eligibility requirements for the plan.

Experts Have Indicated Companies are Often Unclear on How to Establish Executive Retirement Plan Eligibility

Many industry experts we spoke to said that eligibility requirements for executive retirement plans are not clearly defined and that companies are unclear on how to establish eligibility. DOL has acknowledged that at least in one case a company may have denied ERISA protections to rank- and-file employees by allowing them to participate in executive retirement plans. DOL officials also said the agency has issued guidance on the executive retirement plan provisions in ERISA. For example, DOL pointed us to Advisory Opinion 90-14A, which DOL officials said is the agency’s most recent advisory opinion on provisions related to plan participant eligibility. The Advisory Opinion restates that executive retirement plans are excluded from most of ERISA’s substantive protections and describes DOL’s view that the term “primarily,” as used in the statute, refers to the purpose of the plan—the benefits provided—rather than the participant composition of the plan (see fig. 11). The Advisory Opinion further states DOL’s view that executive retirement plans that include employees who are not from a select group of management or highly compensated would fail to constitute a “select group” under ERISA, which would subject the plan to all of the requirements of Title I.

Despite the information in the Advisory Opinion, several industry experts expressed the view that DOL’s current policy lacks specific information on the factors companies should consider when establishing eligibility for participation in these plans. Recent industry surveys we reviewed have suggested some companies may be extending employee eligibility to a relatively high percentage of their workforce—in some cases, more than 30 percent—and to relatively lower-paid or lower-ranked employees. For example, results from a recent survey of executive retirement plan sponsors suggested that just over 8 percent of respondents offer eligibility to between 20 to 30 percent of their workforce and just over 4 percent offer eligibility to more than 30 percent of their employees. Further, over 20 percent of respondents indicated that over 15 percent of their workforce was considered highly compensated employees and eligible to participate in an executive retirement plan. Industry experts pointed to court cases that they identified as contributing to the confusion regarding executive retirement plan eligibility, including cases that have suggested a limit on the percentage of employees who may participate in an executive retirement plan and still constitute a select group. Several industry experts suggested that DOL could help to address this issue in the future by providing a safe harbor that describes limits or thresholds companies could follow to establish eligibility. Two industry experts identified a range of possible information DOL could provide, such as a ceiling on the percentage of the company’s workforce permitted to participate, job titles that could be eligible for participation, or a compensation threshold. Industry experts also suggested more detailed information on factors to consider for eligibility, rather than a “one-size-fits-all” design, would help to ensure the information would be flexible enough for a variety of companies to apply.

We asked DOL officials about issuing clarifying information on the statutory requirements under ERISA for eligibility into these plans. DOL officials stated that the agency has the authority to do so but has no plans to issue guidance because it has not encountered eligibility problems during plan audits and enforcement actions. Rather, DOL officials said that in light of resource constraints, other high priority guidance projects, and the absence of systematic abuses involving these plans, it does not believe it advisable to shift resources from other projects to undertake a guidance project in this area. DOL officials said the agency no longer renders decisions on the status of “select group” eligibility for executive retirement plans in advisory opinions or in response to external inquiries because such determinations involve factual questions that are not well suited to an advisory opinion or informal participant assistance process.

Federal standards for internal control require federal agencies to communicate quality information externally through reporting lines so that external parties can help the entity achieve its objectives and address related risks. By exploring ways it may be able to help reduce the incidence of ineligible employees participating in executive retirement plans, DOL could help ensure ineligible rank-and-file employees are not participating in these plans and are receiving the applicable protections under ERISA. One such way may be by providing information to companies on factors to consider when determining a “select group” to aid companies in establishing plan eligibility.

A related issue that companies can face is dealing with eligibility decisions that turn out to be in error. DOL officials told us they have not issued any guidance on how companies are to correct eligibility errors found in executive retirement plans. Officials referred us to a 2015 amicus brief DOL filed in a particular case that described the department’s views on how companies might consider addressing eligibility errors. The amicus brief suggests that the company could modify the plan to exclude the ineligible rank-and-file employees and award them the full vesting and other protections under ERISA while maintaining the plan’s status under ERISA as an executive retirement plan for those executives who do qualify. However, the amicus brief states that DOL took no position on the form of equitable relief appropriate under ERISA to redress an employer’s violation of vesting requirements by including rank-and-file employees in an executive retirement plan. The amicus brief also suggests that this approach would avoid providing a windfall gain to executives who properly could have been included in such a plan, because they possess sufficient bargaining power to protect their rights, and are not the intended beneficiaries of the substantive provisions under Parts 2, 3, and 4 of Title I of ERISA. When asked about this remedy, DOL officials said that funds from the executive retirement plan could be distributed to a qualified retirement plan for rank-and-file employees, with their benefits immediately fully vested and receiving ERISA protections.

When we discussed the possible remedy described in the amicus brief with IRS officials, they said that while 409A regulations were being drafted, they were aware that applying strict distribution rules could have adverse tax consequences for rank-and-file employees participating in executive retirement plans. IRS officials said that removing these employees from these plans and awarding them full vesting of their benefits under Title I of ERISA could violate section 409A, raising concerns that the possible remedy noted in DOL’s amicus brief may be inadequate for companies seeking a method to correct plan errors. Officials also said that there are certain exceptions under section 409A when accelerated payments may be permitted; however, IRS officials said there is no current exception permitting an accelerated payment to be made to a rank-and-file employee in order to correct a violation of Title I of ERISA.

IRS officials said they are willing to work with DOL to promulgate new section 409A regulations to create an exception to the accelerated payment rule for plans that seek to remove ineligible rank-and-file employees from the plan and make distributions to an employee’s qualified retirement plan in order to maintain the plan’s ERISA exemption. However, IRS officials said that prescribing corrective action in these situations is under DOL’s purview and that DOL first would need to further delineate the meaning of an executive retirement plan employee and then decide the proper approach for removing ineligible rank-and-file employees from a plan before any new regulations under section 409A could be considered. As mentioned above, federal standards for internal control require federal agencies to externally communicate necessary quality information to achieve their objectives. Without additional information from DOL on what companies can do to reduce the incidence of ineligible rank-and-file employees participating in these plans, some ineligible employees may continue to participate in some instances, potentially subjecting them to unexpected tax consequences such as if they are removed from the plan and the payment of their deferred compensation is accelerated. Further, without knowing how to properly remove ineligible rank-and-file employees when they are found participating in executive retirement plans, companies may be uncertain on how to re-establish an executive retirement plan’s exemption from the substantive provisions of Title I of ERISA for otherwise eligible participants.

Conclusions

Although executive retirement plans are an important retirement savings vehicle for corporate executives and other highly compensated employees, little is known about certain key aspects of these arrangements. While some federal regulatory data exist on plans provided to the top five executives of publicly owned companies, information about the design, participation, and benefits provided under plans offered by privately owned companies or offered to employees beyond top five executives are largely unknown, as is their net revenue effect on the federal government.

In addition, IRS has not taken steps nor collected adequate information to know if companies under audit with a qualified single-employer defined benefit plan are setting aside assets for the purpose of paying benefits deferred under executive retirement plans while the companies are in at- risk status—a practice the law intended to discourage. Through effective oversight, IRS can help ensure that it is collecting the appropriate amount of income taxes as a result of this potential practice.

Another important consideration with respect to executive retirement plans is their potential to permit ineligible rank-and-file employees to participate in the plan, thereby leaving such employees without the protections of ERISA. Little information is available at the federal level about who is included in executive retirement plans because companies provide minimal information to DOL only once when they implement such a plan. By revisiting its reporting requirements, DOL can help ensure that only executives who can bear the risks inherent in these plans are permitted to participate. DOL has other opportunities to diminish this risk by providing assistance to companies, such as additional information describing plan eligibility, which could help companies reduce the incidence of rank-and-file employees participating in these plans. In addition, DOL can provide direction that companies can follow to remove rank-and-file employees found participating in these plans to ensure their benefits are protected and coordinate with the IRS so that these employees do not incur unexpected tax consequences that could result from erroneous inclusion in an executive retirement plan.

Recommendations for Executive Action

We are making a total of four recommendations, including one to IRS and three to DOL.

The IRS Commissioner should develop specific instructions within the Internal Revenue Manual, the Nonqualified Deferred Compensation Audit Techniques Guide, or other IRS training material to aid examiners in obtaining and evaluating information they can use to determine whether there exists a restricted period with respect to a company with a single- employer defined benefit plan and if a company with a single-employer defined benefit plan has, during a restricted period, set aside assets for the purpose of paying deferred compensation under an executive retirement plan. (Recommendation 1)

The Secretary of Labor should review and determine whether its reporting requirements for executive retirement plans should be modified to provide additional information DOL could use to oversee whether these plans are meeting eligibility requirements. (Recommendation 2)

The Secretary of Labor should explore actions the agency could take to help companies prevent the inclusion of rank-and-file employees in executive retirement plans and determine which, if any, actions should be implemented. (Recommendation 3)

The Secretary of Labor should provide specific instructions for companies to follow to correct eligibility errors that occur when rank-and-file employees are found to be participating in executive retirement plans, and should coordinate with other federal agencies on these instructions, as appropriate. (Recommendation 4)

Agency Comments and Our Evaluation

We provided a draft of this report to DOL, IRS, PBGC, SEC, Treasury, and the United States Trustee Program within the Department of Justice for review and comment. DOL, IRS, PBGC, SEC, and Treasury provided technical comments, which we have incorporated where appropriate. IRS and DOL also provided formal comments, which are reproduced in appendices II and III, respectively.

In response to our recommendation to develop specific instructions to aid IRS examiners in monitoring executive retirement plans for compliance with federal tax law, IRS stated that they would review and consider developing further specific instructions within the Internal Revenue Manual, the Nonqualified Deferred Compensation Audit Techniques Guide or other IRS training material to aid examiners. GAO continues to maintain that implementing this recommendation will help ensure that IRS is aware of when companies with at-risk single-employer defined benefit plans are reporting assets set aside to pay deferred compensation to key executives while in a restricted period as income for those employees.

DOL stated that it does not have plans to issue guidance or regulations regarding executive retirement plans, citing, among other considerations, existing resource constraints and priority regulatory and guidance projects in development, and that it would not be advisable to shift resources from other projects. GAO continues to maintain that DOL’s one-time single page alternative reporting for executive retirement plans lacks important information sufficient to help the agency identify whether companies may be including ineligible employees in its plan and DOL’s current data on executive retirement plans has limited usefulness due to the age and limits of the original data submitted. DOL also stated that the agency has not encountered evidence of systematic abuses involving executive retirement plans or that ERISA’s claims procedure rules and judicial remedies are inadequate to protect participants’ benefit rights. As we report, industry surveys indicate that some companies may be extending employee eligibility to high percentages of their workforce who are lower- paid and lower-ranked employees who may not be considered a part of a select group. Industry experts also told us that plan eligibility requirements for executive retirement plans are not clearly defined and that companies are unclear on how to establish eligibility, and they identified court cases that contribute to the confusion regarding plan eligibility. Additionally, the remedy DOL suggested in an amicus brief for companies to follow to correct eligibility errors in these plans could have unintended consequences for participants because, according to IRS officials, it could result in violations of federal tax law and additional tax for participants.

Without implementing our recommendations, DOL will continue to be unable to ensure that only executives who can bear the risks inherent in these plans are participating. We urge DOL to develop instructions to correct eligibility errors, in coordination with other federal agencies, as needed, in a way that does not adversely affect rank-and-file employees participating in these plans.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees; the Secretaries of the Departments of the Treasury, Labor, and Justice; the Commissioner of the Internal Revenue Service; the Chairman of the Securities and Exchange Commission; and the Director of the Pension Benefit Guaranty Corporation. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix IV.

Appendix I: Objective, Scope, and Methodology

This report examines (1) what is known about the prevalence, key advantages, and revenue effects of executive retirement plans; (2) the potential outcomes of executive retirement plan benefits in company bankruptcy; and (3) how federal agency oversight protects benefits and prevents ineligible participation in executive retirement plans.

Overall Methodology

To address these objectives, we reviewed relevant federal laws, regulations, guidance, and other agency documents related to executive retirement plans. We reviewed relevant research on executive retirement plans, which we identified with the help of a GAO librarian, through stakeholder interviews, by reviewing sources cited in documents we obtained, and through limited internet searches driven by stakeholder and documentary evidence. This research included published research on the costs of executive retirement plans on the companies that offer them and the revenue effects on the federal government. We interviewed a non- generalizable sample of executive retirement plan experts representing different roles in the industry, including plan consultants, plan providers (including record keepers and insurers), attorneys, investment advisors, actuaries, proxy advisors, and researchers. We also interviewed an array of bankruptcy experts—including those with experience in executive compensation—to understand bankruptcy procedure and the treatment of executive retirement plans in company bankruptcy. We selected executive retirement plan and bankruptcy experts to interview based on a combination of published work, breadth and depth of experience, as well as peer referrals. We interviewed representatives from industry associations representing a diverse range of stakeholder groups, such as those that offer, provide services to, or conduct research on executive retirement plans. As part of this effort, we contacted the American Institute of Certified Public Accountants to discuss their perspective on the use of executive retirement plans but they declined to meet with us. We also interviewed agency officials from the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA), Department of the Treasury’s Office of Tax Policy, the Internal Revenue Service (IRS), the Securities and Exchange Commission, the Pension Benefit Guaranty Corporation (PBGC), and the United States Trustee Program within the Department of Justice.

Prevalence of Executive Retirement Plans

To understand the prevalence of executive retirement plans, we analyzed data provided by the Main Data Group (MDG), an executive compensation benchmarking and corporate governance analytics firm. MDG compiled the data provided from required SEC disclosures from filing years 2013 to 2017 (the most recent data available at the time of our analysis) for executive retirement plan benefits provided to top executives in Standard & Poor’s (S&P) 500 and Russell 3000 companies as reported in the annual 10-K, proxy statement, and other documents. Companies listed in the S&P 500 are generally also listed in the Russell 3,000. The SEC generally requires public companies to disclose executive compensation information—including executive retirement plan benefits— provided to the Chief Executive Officer, Chief Financial Officer, and the next three most highly compensated executive officers. These data are principally found in the annual proxy statement within the Summary Compensation Table, Pension Benefits Table, and Nonqualified Deferred Compensation Table. The data include executive retirement plan benefits offered as a defined benefit plan and defined contribution plan. For a given year, the total accumulated value of executive retirement plans structured as a defined benefit provided to top executives are based on the “present value of accumulated benefit” and “payments during the last fiscal year” as reported in the Pension Benefits Table. For defined contribution plans, the total accumulated values are based on the “aggregate balance at last fiscal year end” and the “aggregate withdrawals/distributions” for the reporting period as disclosed in the Nonqualified Deferred Compensation Table. To determine the average level of plan benefits for top executives, we summed the total accumulated plan benefits for all top executives in a given year and divided them by the total number of executives. For the median, we sorted the total accumulated plan benefits for all executives in a given year and determined the midpoint. To assess the reliability of the data provided, we interviewed MDG officials regarding their data collection processes. We also independently compared executive retirement plan data from a random sample of SEC filings obtained from Edgar (the SEC’s public database for required disclosures) with data for the same companies as reported by MDG. We found the data to be sufficiently reliable for the purpose of describing the prevalence of executive retirement plans among companies subject to SEC’s disclosure requirements.

Corporate Bankruptcy Case Reviews

To understand the expected outcomes for executive retirement plan benefits during company bankruptcy, we analyzed data collected from our non-generalizable review of a random sample of companies that offered an executive retirement plan and filed for bankruptcy during the period from October 17, 2005—the effective date for most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Bankruptcy Act)—through November 30, 2017— the most recent at the time of our analysis. The 2005 Bankruptcy Act made significant changes to federal bankruptcy law, including provisions limiting executive compensation in corporate bankruptcy. Using the unique Employer Identification Number (EIN) the IRS assigns to companies, we matched corporate Chapter 7 and Chapter 11 bankruptcy cases with DOL’s database of executive retirement plans to obtain lists of companies that filed for bankruptcy and offered at least one executive retirement plan. We obtained lists of corporate bankruptcy filings from New Generation Research Inc.’s (NGR) online database. NGR is a provider of data on corporate bankruptcies and companies in financial distress. We obtained from DOL its comprehensive list of executive retirement plans as filed with the agency from July 1982 to August 2017. The NGR and DOL data are not exclusive to public or private companies. To assess the reliability of the NGR and DOL data, we corresponded with officials regarding their respective data collection processes and requirements. We found the data to be sufficiently reliable for our purposes. The results of our data matching produced 138 Chapter 7 cases and 594 Chapter 11 cases of companies that filed for bankruptcy and offered an executive retirement plan. We reviewed a random selection of 151 cases (30 Chapter 7 and 121 Chapter 11) from a total of 732 relevant bankruptcy cases.

To review bankruptcy court cases, we developed a standardized protocol to review each identified case and data collection instrument to input the data. The protocol included step-by-step instructions for reviewers to follow, including prescribed court documents to review and data to be collected. We obtained feedback on our case review protocol and data collection instrument from two outside bankruptcy experts—an attorney with expertise in the tax aspects of corporate bankruptcies and a bankruptcy law professor and former attorney who previously served as a federal bankruptcy judge—and incorporated their technical feedback on the documents. We also worked with a GAO methodologist to pretest our case review protocols and data collection instruments on a review of a select sample cases from the matched list to ensure our review process could collect reliable data between different reviewers.

To obtain bankruptcy case documents to review, we used court filings obtained from PACER exclusively and did not rely on other data sources. PACER is an electronic public access service provided by the Federal Judiciary that allows users to obtain case and docket information online from federal appellate, district, and bankruptcy courts. Case documents are available on PACER as they are filed or entered into the court’s case system. Based on our case review protocol, we reviewed (where available), the court docket, case summary, bankruptcy petition, first day motions, management affidavit, schedule of assets and liabilities, statement of financial affairs, court-approved disclosure statement, court- approved plan (of reorganization or liquidation), and settlement agreements, among other documents with information relevant to executive retirement plans and their expected resolution in bankruptcy. We reviewed cases based on documents available in PACER between April and May 2018.

Our review of 151 cases (30 Chapter 7 and 121 Chapter 11) from the matched lists resulted in 38 Chapter 11 cases where we identified executive retirement plan benefits in existence at or around the time of company bankruptcy and were able to determine the expected resolution of those benefits for employees as a result of the bankruptcy proceeding. As part of our review, we excluded cases if: (1) we were unable to confirm the presence of an executive retirement plan through review of court documents, (2) the case did not have a court-approved disclosure statement with estimated recovery percentages for various creditor classes in the case docket, or (3) if the case was open (i.e., not terminated) and had a reorganization or liquidation plan confirmed on or after May 2016, about 2 years from the start of our review. For the foregoing reasons, we were unable to identify expected outcomes in any of the Chapter 7 cases reviewed. For Chapter 11 cases, we were unable to ascertain actual outcome information for any of the cases we reviewed, but based the expected outcome of the executive retirement plan benefits on estimates provided in the court-approved disclosure statement, bankruptcy plan (reorganization or liquidation), or settlement agreement, which may differ from actual recoveries. To determine the expected resolution of executive retirement plan benefits, we reviewed case filings for evidence of specific treatment provided to employees with these claims. To the extent we did not find evidence of specific treatment for executive retirement plan benefits, we relied on estimated recovery information for the class of general unsecured creditors. Because the nature of bankruptcy proceedings depends on the facts and circumstances of each individual cause, the results of our analysis are not generalizable but provide illustrative examples of the potential outcomes of such cases.

Review of Selected Court Cases and Surveys on Plan Eligibility and Participation

We reviewed selected court cases related to employee eligibility in executive retirement plans as identified by DOL, industry experts, and other literature. We also reviewed executive retirement plan surveys produced by industry firms, including plan sponsor organizations, benefit consultancies, record keepers, and other plan providers. We also interviewed representatives from many of these organizations regarding the use of executive retirement plans and determined that their survey data generally accorded with these discussions. We found the data to be sufficiently reliable for our purposes.

Appendix II: Comments from the Internal Revenue Service

Appendix III: Comments from the Department of Labor

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, the following individuals made important contributions to this report: Tamara Cross (Assistant Director), David Lin (Analyst-in-Charge), Ted Burik, Dan Powers, and David Reed. Also contributing to this report were James Bennett, Joanna Berry, Colenn Berracasa, Sherwin Chapman, Nina Daoud, Sarah Gilliland, Laura Hoffrey, Angie Jacobs, Kirsten Lauber, Ted Leslie, Avani Locke, Sheila R. McCoy, James R. McTigue Jr., Jeffrey Miller, Ed Nannenhorn, Oliver Richard, Marylynn Sergent, Frank Todisco, Walter Vance, Kathleen Van Gelder, and Adam Wendel.