Retirement Heist: how companies plunder and profit from the nest eggs of American workers

“At some point in the future, the IRS may well take the position” that supplemental executive pensions moved into a regular pension plan “violate the ‘spirit’ of the nondiscrimination rules,” he wrote. Companies have been able to blow the practice past the IRS because, when they file the amendments, they don’t explicitly note the purpose of the change and include it with a flurry of other technical amendments. In any case, the IRS staff is stretched too thin to scrutinize the dozens of pages of complex calculations companies perform to prove that they don’t discriminate. In contrast with a deduction a freelance worker might take for a home office, the IRS generally accepts an employer’s word that its pension plan doesn’t discriminate. To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests, which is something employers have strongly opposed.

And though companies are supposed to disclose details of the compensation of their top officers, they maintain that, because the executives’ benefits are now part of the broad-based plans, they are no longer considered to be executive benefits, so disclosure isn’t required.

DISCRIMINATION 101

These techniques were spawned in the early 1990s, when the IRS issued new rules intended to rein in an employer’s inclination to set up and run retirement plans for the favored few. To get tax breaks that allow them to deduct contributions and have the money grow tax-deferred, companies had to prove that their pensions, profit sharing, and 401(k)s don’t discriminate.

Employer groups hadn’t stood idly by awaiting these new regulations. As they had when FASB crafted new pension and retirement benefits accounting rules, employers and their consultants weighed in, demanding flexibility. They got their wish.

As a result, employers don’t have to actually treat everyone participating in the pension or savings plan the same. They are allowed to have a certain amount of “disparity,” or inequality, as long as they can pass certain tests showing that they weren’t going too far.

The first test is the so-called coverage test, which essentially determines that if 100 percent of the higher-paid executives are going to participate in a plan, then at least 70 percent of the lower-paid must also participate.

Thus, in a perverse way, this anti-discrimination rule makes it legal for employers to exclude 30 percent of their low-paid workers from a particular plan right off the bat.

Even before applying the coverage test, employers generally exclude many part-time workers, independent contractors, and “leased” employees, such as janitorial, security, and cafeteria workers. These categories make up about 25 percent of the U.S. workforce.

The diminished pool of employees “eligible” to participate don’t necessarily get their feet in the plan right away. They must first pass certain hurdles. These might require that they be twenty-one or older, work one thousand hours, or reach December 31 of the year following the year they were employed.

Excluding employees doesn’t just save money: It enables higher-paid employees to receive the maximum benefits. Under IRS rules, the amount higher-paid workers contribute to a 401(k) can’t be greater than a certain percentage of what the lower-paid contribute. But if the lower-paid contribute too little, the contribution gap will be too great, and the higher-paid won’t be allowed to contribute the maximum ($16,500 in 2011). The simplest way of closing the gap is to exclude as many lower-paid workers as possible. In the fast-food, retail, and hotel industries, it’s common for at least half the workforce to be locked out of the savings plans.

Inadvertently, this kind of legal salary discrimination can have a disproportionate impact on women and minorities. For years, Hugo Boss, which makes high-end clothing, excluded the 80 or so workers at its warehouse in Midway, Georgia, from the 401(k) retirement plan that it offered to the 232 employees and managers at its Cleveland headquarters. With their low salaries, the warehouse workers, mostly black women, would have contributed little to their accounts, causing the plan to fail another discrimination test, one that compares the contributions of the low paid and the highly paid. If the gap is too wide, the highly paid can’t contribute the maximum to their accounts ($16,500 in 2011). Ironically, the easiest way to prevent this outcome is to exclude low-paid workers altogether.

Countless studies and surveys lamenting the low participation rates of employees barely making a living wage have portrayed low-income workers as apathetic about saving money. Similar studies also trot out statistics about the low savings rates of blacks and Hispanics, and of women compared with men.