GAO Calls for Stronger Oversight of Executive Retirement Plans; Senator Sanders Introduces Legislation in Response

Legal Alert

The United States Government Accountability Office (the “GAO”) has made public its January 28, 2020, report to Congress on the oversight of executive retirement plans by the Internal Revenue Service (the “IRS”) and the U.S. Department of Labor (the “DOL”). In the report, the GAO makes four recommendations, including one directed at the IRS, which oversees executive retirement plans for compliance with federal tax laws, and three directed at the DOL, which oversees these plans to ensure that only eligible employees participate in them because these plans are excluded from most of the federal substantive protections that apply to tax-qualified retirement plans. The GAO recommendations are aimed at ensuring that the IRS identifies deferred compensation subject to federal taxes and that the DOL is providing appropriate protections to rank-and-file employees whose retirement savings could be at risk if they participate in executive retirement plans.


The GAO said that 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 these plans to almost 2,300 of their top executives, with accumulated benefit promises of approximately $13 billion. There are currently no statutory limits on the amount of compensation that executives can defer under these plans or on the benefits they can receive. However, to receive tax deferral, federal law requires the deferred compensation to remain part of a company’s assets and subject to creditor claims until the participating executives receive distributions. Additional restrictions apply to tax exempt and governmental entities. Consequently, benefits under executive retirement plans are subject to risk, such as in a company bankruptcy. The GAO investigation was prompted by an inquiry by United States Senator Bernie Sanders (I-Vt) and two other senators. Bruce J. McNeil, a partner with Stoel Rives LLP with extensive nonqualified executive retirement plan experience, was selected by the Plan Sponsor Council of America to lead discussions with the GAO analysts and met with the GAO lead analyst on several occasions during the course of the investigation. The GAO examined the prevalence, key advantages, and revenue effects of executive retirement plans and how federal oversight protects benefits and prevents participation by ineligible rank-and-file employees.

GAO Findings and Recommendations

The GAO found that while Department of Treasury officials and industry experts said that executive retirement plans can be tax-advantaged plans that may have revenue effect for the federal government, the revenue effects are currently unknown. Further, the GAO found that the instructions provided by the IRS to its auditors do not include sufficient information to help auditors know what data to collect or what questions to ask to determine if companies are complying with the federal tax rules relating to executive retirement plans. The GAO also found that the DOL reporting requirements for executive retirement plans (often referred to as “top-hat filings”) do not collect the information the DOL needs to monitor plan participation and ensure participation does not include ineligible employees.

The four recommendations made by the GAO in its report are:

  1. 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 a restricted period exists with respect to a company with a single employer defined benefit plan and whether 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. For purposes of this recommendation, 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 six 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% funded.
  2. The Secretary of Labor should review and determine whether its reporting requirements for executive retirement plans should be modified to provide additional information the Department could use to oversee whether these plans are meeting eligibility requirements.
  3. 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.
  4. 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.

Agency Response

The GAO provided a draft of its report to the Treasury Department, the DOL, the IRS and other agencies and incorporated technical comments provided by the agencies where appropriate. In response to the specific recommendations made by the GAO, the IRS said that it would review and consider developing further specific instructions for its examiners. The DOL said that it does not plan to issue guidance or regulations regarding executive retirement plans because of existing resource constraints and priority regulatory projects in development. The DOL stated that it has not encountered evidence of systematic abuses involving executive retirement plans, but the GAO maintains that the DOL’s one-time, single page top-hat filings lack sufficient information to ensure that ineligible employees are not being included in these plans.

Plan Sponsor Considerations

Employers who maintain executive retirement plans for their key executives should be aware of Congressional interest in these plans and the GAO findings.

On February 27, 2020, the same day the GAO report calling for more agency oversight of executive retirement plans was made public, Senators Sanders and Chris Van Hollen (D-Md.) introduced legislation that takes aim at tax benefits for executives who participate in deferred compensation plans and requires the IRS and the DOL to respond to the four recommendations in the GAO report. Under the bill, deferred compensation in executive retirement plans would be included in taxable income when the deferred compensation is not subject to a substantial risk of forfeiture rather than when it is distributed, as is the case today for tax-exempt entities. According to Sanders and Van Hollen, the bill could raise an estimated $15 billion in federal revenue. The revenue would be transferred to the Pension Benefit Guarantee Corporation to help shore up multiemployer pension plans, some of which have been underfunded for years. The bill would also require the DOL to increase the disclosure requirements applicable to executive retirement plans by December 31, 2020.

According to the Wall Street Journal, similar changes to executive retirement plans were included in initial versions of the Republican 2017 tax plan but were not included in the final law after companies complained. While it is too early to predict the fate of the Sanders and Van Hollen bill, plan sponsors should expect that executive retirement plans will continue to come under scrutiny as Congress looks for revenue generating opportunities and responds to pressure to provide retirement protections for rank-and-file American workers. Whether as a result of the Sanders and Van Hollen bill, later legislation, or agency action, stronger oversight of executive retirement plans will likely take the form of detailed annual reporting requirements.

If you have any questions, please contact Bruce J. McNeil, who participated in the GAO investigation, or one of the other listed contacts.

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