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GAO-14-334R 1 (2014-03-20)

handle is hein.gao/gaobaahsi0001 and id is 1 raw text is: G A O U.S. GOVERNMENT ACCOUNTABILITY OFFICE 441 G St. N.W. Washington, DC 20548 March 20, 2014 The Honorable Ron Wyden Chairman Committee on Finance United States Senate Private Pensions: Pension Tax Incentives Update Dear Chairman Wyden: To encourage private-sector employers to sponsor pension plans and U.S. workers to save for retirement, federal law authorizes a variety of tax incentives for employer-sponsored pension plans and other retirement savings vehicles. These tax incentives are structured to strike a balance between encouraging employers to start and maintain voluntary, tax-qualified pension plans and ensuring that lower-income employees receive an equitable share of the tax- subsidized benefits.1 For example, under current federal law, certain employer contributions to qualified pension plans, contributions made at the election of the employee through salary reduction, and income earned on pension assets are not taxed until distributed. Yet these tax deferrals come at a cost. The Joint Committee on Taxation has estimated that in fiscal year 2014, the tax expenditures for such deferrals will result in the U.S. Treasury forgoing around $100 billion in income taxes.2 To prevent use of these tax incentives to subsidize excessively large pension benefits, legislation has been enacted to constrain the amount of tax-deferred contributions that can be made to tax-qualified pension plans. We issued reports in 20013 and 20114 that, among other 1 The Internal Revenue Code (IRC) establishes requirements that private pension plans must satisfy, including minimum coverage and benefits, in order to qualify for favorable tax treatment. Employers that sponsor these tax- qualified plans are entitled to a deduction (within limits) for the contributions they make, and contributions are not included in an employee's income until benefits are received. Small employers with fewer than 100 employees may also qualify for a federal tax credit for costs associated with starting a new pension plan. One important requirement for tax-qualified pension plans of private employers is that contributions or benefits be apportioned in a nondiscriminatory manner between highly compensated employees and other workers. See 26 U.S.C. §§ 401 (a)(4), 401 (a)(5), and 414(q). 2 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017 (Washington, D.C.: Feb. 1, 2013).This estimate is based on provisions of federal tax law enacted through January 2, 2013. A tax expenditure is measured by the difference between tax liability under present federal law and the tax liability that would result from a recomputation of tax without benefit of the tax expenditure provision. The only larger individual tax expenditure in fiscal year 2014 is expected to be the exclusion of employer contributions for medical insurance premiums ($143 billion). 3 GAO, Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution Plans, GAO-01-846 (Washington, D.C: Sept. 17, 2001). 4 GAO, Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits, GAO-1 1-333 (Washington, D.C.: Mar. 30, 2011). GAO-14-334R - Pension Tax Incentives Update Page 1

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