Private Pensions: Little Information Available on Qualified Supplemental Executive Retirement Plans Page: 2 of 23
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encouraging employers to start and maintain voluntary, tax-qualified pension plans
and ensuring that employees receive an equitable share of the tax subsidized
To achieve and maintain tax-qualified status, DB plans must comply with multiple
federal requirements that are designed to ensure that executives and other highly
compensated employees (HCE) do not receive excessively high benefits, both in an
absolute sense and relative to nonhighly compensated employees (NHCE).3 These
include limits on total benefit levels, limits on the amount of compensation that can
be included in determining benefit levels, and limits on disparities in benefits
between HCEs and NHCEs. For instance, the Internal Revenue Code (IRC) places a
limit of $195,000 on the annual benefit that an individual can receive from a tax-
qualified pension plan beginning at age 62. In addition, it sets a limit of $245,000 on
the amount of annual compensation that can be used in calculating the benefit
amount. Third, the IRC and Internal Revenue Service (IRS) regulations require that
benefits in a tax-qualified plan not discriminate significantly in favor of HCEs in
terms of coverage and benefit amounts (the "nondiscrimination requirements").
The goal of the nondiscrimination requirements is to encourage expanded coverage
and greater distribution of benefits between the highly paid and workers at lower
earnings levels. To demonstrate compliance, plan sponsors may use an IRS
preapproved plan or develop a customized plan, which must pass general
nondiscrimination tests.4 These tests generally require a plan sponsor to perform
mathematical calculations that compare the proportion of NHCEs who benefit
under a tax-qualified plan with the proportion of HCEs who benefit, taking into
account their respective benefit accrual rates." Pursuant to IRS regulations, the
timing of plan amendments must also be nondiscriminatory. A plan sponsor can,
but is not required to, request a determination letter from IRS confirming that the
level of benefits under the plan meets the regulatory standards relating to benefit
accrual rates. To obtain IRS review of whether a plan amendment is
nondiscriminatory, the plan sponsor must demonstrate compliance with objective
requirements by providing specific demonstrations in the determination letter
request filed with IRS.
Due to the restrictions placed on benefits in a tax-qualified plan, some private
sponsors of tax-qualified retirement plans provide additional nontax-qualified
supplemental retirement benefits to certain HCEs as part of the HCE's total
compensation. These benefits do not enjoy the tax advantages conferred upon
qualified plans. In addition, any assets backing these benefits generally remain
company assets and, depending on the funding arrangement, could be withdrawn
3For 2011, the IRC defines an HCE as an employee who earns in excess of $110,000 per year.
4IRS preapproved plans generally provide uniform benefits to all employees.
5For example, to demonstrate that a plan is nondiscriminatory in terms of employee coverage, a plan
sponsor can use the "ratio test" to demonstrate that the percentage of NHCEs who benefit under a
plan is at least 70 percent of the percentage of HCEs who benefit under the plan.
GAO-11-533R Qualified Executive Pensions
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United States. Government Accountability Office. Private Pensions: Little Information Available on Qualified Supplemental Executive Retirement Plans, text, May 12, 2011; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc298589/m1/2/: accessed April 18, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.