Tax law still likely to spur employers to make, boost retirement contributions

Could the new tax law push businesses to up their contributions to defined benefit plans sooner rather than later?

Cerulli’s recent report explores how December’s Tax Cuts and Jobs Act is likely to affect corporate pensions and private equity investors. And it’s not all bad.(Photo: Getty)

Although the jury is still out on what the American public thinks of the new tax law, there is one element of it that could brighten the day of those worrying about the viability of their employers’ retirement plans

Cerulli Associates reports in its second-quarter 2018 issue of The Cerulli Edge—U.S. Institutional Edition that the change in tax rates taking place this year is likely to push businesses to boost their contributions to U.S. defined benefit plans sooner rather than later, and quite possibly more rather than less. The report explores how December’s Tax Cuts and Jobs Act is likely to affect corporate pensions and private equity investors.

With the 2017 plan year ending on October 15, 2018, and a lower corporate income tax rate of 21 percent taking effect, businesses are looking at the larger tax deduction — at the current tax rate of 35 percent — they will receive if they make plan contributions prior to that date.

“Corporations are mindful of the timing of their expenses and how lower tax rates will affect the amount owed to the Internal Revenue Service,” James Tamposi, research analyst at Cerulli, says in the report.

Tamposi adds, “By expensing items earlier, they can deduct more from their 2017 tax bills.” He points out that “the tax shield for contributions made after mid-September will be smaller by a corresponding amount” for businesses that do not act promptly.

“The early contribution incentive applies to corporate plan sponsors with DB pension plans that are largely underfunded, slightly underfunded, and even fully funded,” Alexi Maravel, a director at Cerulli, is quoted in the report.

Maravel continues, “In addition, the corporate income tax shield incentive has a finite window; after October, this will no longer be a catalyst for contributions.” As a result, the report says that companies considering these factors are actually contributing more than the required minimum so that they can take full advantage of the tax deductions.