Sponsors of private sector defined benefit pension plans are looking tomake accelerated voluntary contributions to plans in the wake oftax reform, according to multiple pension consultants.

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Already, a number of large DB plan sponsors have announcedincreased voluntary contributions: FedEx, Lockheed Martin, Pfizer,and Harris Corp. are among them.

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In slashing the corporate marginal tax rate to 21 percent from35 percent, the tax bill is expected to motivate morecontributions above the statutory minimum, as sponsors look tobenefit from deducting contributions at the higher of the tworates.

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Plans set on a calendar year schedule have until September 15,2018 to benefit from deducting contributions at the higher 35percent rate.

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After that date, funding pensions will in effect be moreexpensive, because the deduction on contributions will be of lessvalue, explained Richard McEvoy, a pension consultant with globalconsultancy Mercer.

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“It’s clearly beneficial for sponsors to consider voluntarilyfunding pension plans,” McEvoy explained in a webinar.

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According to data from Mercer, 75 percent of sponsors wereconsidering larger voluntary contributions in anticipation of taxreform passing last year.

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In a survey of 241 companies since reform passed, more thanthree-quarters reported that they will see their effective tax ratereduced. About one-third said they plan to redirect the savings, atleast in part, to employee benefit and compensation programs. But42 percent said they don’t intend to redirect savings to workers,according to Mercer.

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Consultants from the firm said the flurry of companyannouncements on defined benefit and other compensation investmentssince the reform bill was signed was not expected so soon.

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For DB plan sponsors, accelerating contributions by this year’sdeadline will create considerable tax savings.

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In a simple equation provided by actuarial firm October Three, aplan with $100 million in unfunded liabilities will net $14 millionin tax savings if they fully fund the pension before the Septemberdeadline, as opposed to waiting until after the deadline.

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Moreover, sponsors have the chance to lower the variable ratepremiums on unfunded liabilities paid to the Pension BenefitGuaranty Corp.

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In 2018, the variable rate is roughly equal to 3.8 percent ofunfunded liabilities, and in 2019 it is scheduled to increase to4.3 percent, or $4.3 million in variable premiums for thehypothetical plan with $100 million in unfunded liabilities.

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When accounting for the elimination of variable rate premiumsover five years, the value of accelerating contributions ispotentially massive.

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“When you add it all up, a $100 million pension contributionthis year could net $30 million or more to the company. For pensionsponsors that are also taxpayers, this is an historic opportunity,”wrote Brian Donohue, an actuary at October Three, in a blogpost.

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Under pension law, companies are limited in the contributionsthey can deduct.

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And plans that terminate or freeze with a funding surplus arepotentially exposed to income taxes on so-called strandedsurpluses, and up to a 50 percent excise tax on the value of theextra assets.

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“One concern sponsors have about aggressively funding DBobligations is the possibility of a stranded surplus,” notesDonohue.

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It’s rare when terminated plans wind up with taxable surpluses,says Donohue. In the event they do, sponsors can merge the assetswith another plan’s unfunded liability under the same sponsor. Inanother option, sponsors can use the surplus assets to fund definedcontribution plans for up to seven years after a defined benefitplan terminates.

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“In our view, the idea that DB sponsors must ‘thread the needle’in order to terminate pension plans without incurring excise andincome taxes is highly exaggerated,” Donohue wrote.

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“Employers can employ a wide range of strategies to makeeffective use of even large pension surpluses. And given thehistoric but time-sensitive opportunity related to the 35 percentcorporate tax rate for 2017, many employers would benefit fromunderstanding these ideas better,” he added.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.