Corporations cheat the system by using tax break to beef up rewards for sociopathic CEOs who Run Corporate Amerikkka

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n recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.

But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.

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ntel's case shows how lucrative such a move can be. It involves Intel's obligation to pay deferred compensation to executives when they retire or leave. In 2005, the chip maker moved more than $200 million of its deferred-comp IOUs into its pension plan. Then it contributed at least $187 million of cash to the plan.

Now, when the executives get ready to collect their deferred salaries, Intel won't have to pay them out of cash; the pension plan will pay them.

Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel's contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel's executive compensation.

Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.

Fred Thiele, Intel's global retirement manager, said the benefit was probably somewhat lower, because if Intel hadn't contributed this $187 million to the pension plan, it would have invested the cash or used it in some other productive way.

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So how can companies boost regular pension benefits for select executives while still passing the IRS's nondiscrimination tests? Benefits consultants help them figure out how.

To prove they don't discriminate, companies are supposed to compare what low-paid and high-paid employees receive from the pension plan. They don't have to compare actual individuals; they can compare ratios of the benefits received by groups of highly paid vs. groups of lower-paid employees.

Such a measure creates the potential for gerrymandering -- carefully moving employees about, in various theoretical groupings, to achieve a desired outcome.

Another technique: Count Social Security as part of the pension. This effectively raises low-paid employees' overall retirement benefits by a greater percentage than it raises those of the highly paid -- enabling companies to then increase the pensions of higher-paid people.

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Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to "minimize this problem" of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it "only to employees who are eligible."

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Royal & SunAlliance, an insurer, sold a division and laid off its 228 employees in 1999. Just before doing so, it amended the division's pension plan to award larger benefits to eight departing officers and directors. One human-resources executive got an additional $5,270 a month for life.

But to do this and still pass the IRS's nondiscrimination tests, the company needed to give tiny pension increases to 100 lower-level workers, said the company's benefits consultant, PricewaterhouseCoopers. One got an increase of $1.92 a month.

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