Congress should cap fat-cat deferred-comp plans

A double standard exists in this country, and it needs to be addressed by members of Congress.

A double standard exists in this country, and it needs to be addressed by members of Congress.
It’s called deferred compensation, and it’s a term that actually means a highly paid corporate executive’s retirement benefit plan.
As reported by InvestmentNews’ Washington bureau chief Sara Hansard last week, Senate Finance Committee leaders are now hammering out a plan to resurrect legislation to place a cap on deferred-compensation plans.
The new proposal would set a limit of $1 million on annual compensation deferral. If more than that amount were actually deferred, corporate biggies would face an immediate taxation on the excess, plus a 20% penalty.
Senate and House members need to take a serious look at this proposed legislation, which may be introduced as early as this month.
The proposed measure would properly place new restrictions on one of the most popular executive benefits in corporate America. To that point, about 95% of Fortune 1000 companies offer deferred-compensation packages in some form.
The proposed legislation is a response to the extraordinary payouts given to top executives which have been hidden from investors for years through deferred-compensation schemes. The limits on deferred pay, if enacted, will have wide repercussions on the compensation agreements common at many U.S. companies. And that’s a good thing.
The deferred-compensation cap was sponsored by Senate Finance Committee Chairman Max Baucus, D-Mont., and Sen. Charles Grassley, R-Iowa. Most rank-and-file workers must pay income taxes for the year in which income is earned, and it is inequitable to allow high-income executives to defer their taxes, the senators pointed out in the Aug. 27 story that Ms. Hansard wrote.
These deferred-compensation plans typically function as high-end retirement accounts for corporate executives. In principle, they work similarly to individual retirement accounts or 401(k) plans but obviously involve far larger sums of dough.
The plans allow the executives to put part of their income, sometimes several million dollars a year, into a special account without immediately paying taxes.
The money earns interest, which isn’t taxed right away. After retirement, the executive withdraws the money and pays taxes on it, but the earlier tax deferrals mean that an account may have grown millions of dollars larger than an ordinary savings account would have.
Of course, for the vast majority of American families, there’s a limit of about $15,000 a year on deferred compensation that is not taxed. That’s the sum that ordinary people can put in a 401(k) plan.
The general rule should apply to all Americans, even very highly compensated executives. Limiting their annual deferral to $1 million is not an unfair burden as many opponents of the proposed legislation have claimed.
What’s more, the law would make it clear that an executive’s pension cannot be hidden under the ruse of deferred compensation.

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