Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans

Some types of employers offer executive retirement plans to help select employees save for retirement. There are no statutory limits on the amount of compensation that executives can defer or benefits they can receive under these plans. However, employees in these plans do not receive the full statutory protections afforded to most other private sector employer-sponsored retirement plans, such as those related to vesting and fiduciary responsibility, among other things. These plans can provide advantages but they also have disadvantages because plan benefits are subject to financial risk, such as in a company bankruptcy. GAO was asked to review these plans.

This report examines, among other objectives, (1) the prevalence, key advantages, and revenue effects of executive retirement plans and (2) how federal oversight protects benefits and prevents ineligible participation. GAO analyzed industry-compiled Securities and Exchange Commission plan data for 2013 to 2017 (the most recent data available at the time of our analysis); reviewed relevant federal laws, regulations, and guidance; and interviewed officials from IRS and DOL, among others.

Executive retirement plans allow select managers or highly compensated employees to save for retirement by deferring compensation and taxes. As of 2017, more than 400 of the large public companies in the Standard & Poor's 500 stock market index offered such plans to almost 2,300 of their top executives, totaling about $13 billion in accumulated benefit promises. Top executives at large public companies generally accumulated more plan benefits than top executives at the smaller public companies in the Russell 3000 stock market index. Advantages of these plans include their ability to help executives increase retirement savings and potentially reduce tax liability, but the plans come with risks as well. To receive tax deferral, federal law requires the deferred compensation to remain part of a company's assets and subject to creditor claims until executives receive distributions (see figure). Department of Treasury officials and industry experts said executive retirement plans can be tax-advantaged and may have revenue effects for the federal government; however, the revenue effects are currently unknown.

The Internal Revenue Service (IRS) oversees executive retirement plans for compliance with federal tax laws. For example, IRS must ensure that key executives are taxed on deferred compensation in certain cases where that compensation has been set aside, such as when a company that sponsors a qualified defined benefit retirement plan is in bankruptcy. However, IRS audit instructions lack sufficient information on what data to collect or questions to ask to help its auditors know if companies are complying with this requirement. As a result, IRS cannot ensure that companies are reporting this compensation as part of key executives' income for taxation. The Department of Labor (DOL) oversees these plans to ensure that only eligible employees participate in them since these plans are excluded from most of the federal substantive protections that cover retirement plans for rank-and-file employees. DOL requires companies to report the number of participants in the plan; however, the one-time single page filing does not collect information on the job title or salary of executives or the percentage of the company's workforce participating in these plans. Such key information could allow DOL to better identify plans that may be including ineligible employees. Without reviewing its reporting requirements to ensure adequate useful information, DOL may continue to lack insight into the make-up of these plans and will lack assurance that only select managers and highly compensated employees are participating.

GAO is making four recommendations, including that IRS improve its instructions for auditing companies that offer these plans, and that DOL consider modifying reporting by companies to better describe participants in these plans. IRS and DOL neither agreed nor disagreed with our recommendations.

Executive retirement plans allow select managers or highly compensated  employees to save for retirement by deferring the receipt of compensation  and paying taxes on that compensation and earnings upon distribution in  a future year. Generally, there are no statutory limits on the amount of  compensation that executives are allowed to defer or benefits they can  receive through an executive retirement plan. However, executives  participating in these plans face financial risks because the tax-deferred  compensation is considered an unfunded and unsecured company  promise to pay and assets associated with the plan remain as assets of  the company, subject to creditor claims in bankruptcy. Therefore,  benefits for executives are not guaranteed. Executive retirement plans  can have costs for the companies that offer them and may have revenue  effects for the federal government. Executive retirement plans are also  exempt from most requirements under Title I of the Employee Retirement  Income Security Act of 1974, as amended (ERISA). Thus, employees  included in the plan do not receive the full protections of ERISA.

Given a lack of comprehensive federal agency data on executive  retirement plans, it is difficult to know how costly or beneficial these plans  are for executives and companies, and what the revenue effects of these  plans are for the federal government. You asked us to review how these  plans are used and what benefits these plans offer executives. This report  examines (1) what is known about the prevalence, key advantages, and  revenue effects of executive retirement plans; (2) potential outcomes for  executive retirement plan benefits in company bankruptcy; and (3) how  federal oversight protects benefits and prevents ineligible participation in  executive retirement plans.

To better understand the prevalence, key advantages, and revenue  effects of executive retirement plans, we analyzed data purchased from  the Main Data Group (MDG), an executive compensation benchmarking  company, which compiled data from Securities and Exchange  Commission (SEC) disclosures on executive retirement plan benefits  provided to top executives at public companies. We analyzed 2013 to  2017 data, which were the most recent available at the time of our  analysis. 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 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 our purposes of  providing high level trend information on executive retirement plans. We  reviewed relevant research on the cost of executive retirement plans on  companies that offer them, key advantages to executives that participate  in these plans, and the revenue effects of these plans to the federal  government. We also interviewed a range of industry experts regarding  the use of executive retirement plans; including attorneys, plan  consultants, record keepers, third-party administrators, industry groups,  investment advisors, and researchers. We selected executive retirement  plan 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.

To provide insight into the potential outcomes of executive retirement plan  benefits during company bankruptcy, we conducted a non-generalizable  review of a random sample of companies that provided 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 certain forms of  executive compensation in corporate bankruptcy. We reviewed 151  randomly selected corporate bankruptcy cases (30 Chapter 7 and 121  Chapter 11) from a total of 732 relevant bankruptcy cases (138 Chapter 7  and 594 Chapter 11). We based our analysis on data from 38 Chapter 11  cases, where we identified executive retirement plans in existence at or  around the time of company bankruptcy, and we were able to identify in  court filings estimated recovery percentages for how plan benefits were  expected to be resolved through each case. 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 potential outcomes from such cases.

To better understand how federal agency oversight protects participant  benefits and prevents ineligible employees from participating in these  plans, we reviewed court cases identified by Department of Labor (DOL)  officials and industry experts related to employee eligibility in these plans  and current DOL policy related to plan eligibility. We also reviewed  relevant federal laws, regulations, guidance, and documents related to  these plans. We interviewed officials from DOL, the Department of the  Treasury (Treasury), the Internal Revenue Service (IRS), SEC, the  Pension Benefit Guaranty Corporation (PBGC), and the United States  Trustee Program (USTP) within the Department of Justice to determine  the extent of federal oversight or involvement with executive retirement  plans—including during company bankruptcy—as well as whether they  have issued relevant guidance or regulations. We also asked industry  experts for their perspectives on guidance and other information related  to eligibility and other issues affecting executive retirement plans.

We conducted this performance audit from September 2016 to January  2020 in accordance with generally accepted government auditing  standards. Those standards require that GAO plan and perform the audit  to obtain sufficient, appropriate evidence to provide a reasonable basis  for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for the  report’s findings and conclusions based on the report’s audit objectives.

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.

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).

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).

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.

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.

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.

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.

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.

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.

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.

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.

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)

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.

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.

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

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.

Executive retirement plans allow some executives to defer their pay and related income taxes to future years. We looked at these plans and found:

Benefits for executives—e.g., no limits on how much pay can be deferred

Risks for executives—if companies go bankrupt, they may not receive deferred pay

Little oversight information—oversight agencies don’t have much data on who’s participating

Federal revenues—the effect of these plans on federal revenues is unknown

Our recommendations to IRS and the Department of Labor are to improve information about these plans and strengthen oversight.