Integrating Pensions and Social Security

Pursuant to a congressional request, GAO provided information on the impact of the 1986 change in the tax code integration provision, focusing on: (1) how integrated plans were modified to conform with the new provision; and (2) trend data relating to integrated plans.

GAO noted that: (1) the actuaries and studies GAO consulted indicated that the Tax Reform Act of 1986 (TRA86) may not have had an immediate impact on many integrated plans because in 1986 these plans appeared to already meet the new integration provision; (2) in 1986, most plans using the offset method of integration generally reduced pension benefits by no more than 50 percent, and relatively few excess plans used a formula that withheld all benefits from the plans' lower-paid workers; (3) for plans not already in compliance with the new TRA86 integration provision, plan sponsors' reactions to TRA86 varied; (4) TRA86 increased plan costs for those sponsors who had to modify their plans to comply with the new integration provision; (5) an increasing proportion of sponsors of integrated plans are using the general test, even though initial cost remains high, because it offers design flexibility that can reduce the sponsors' yearly contribution costs; (6) the Internal Revenue Service (IRS) conducted a targeted study of integrated defined contribution plans for fiscal year 1993 to determine whether they complied with the TRA86 pension integration provision; (7) it found that 3 of the 80 plans it audited required changes to bring them into compliance; (8) the IRS is now conducting a targeted study to determine the level of compliance; (9) data from surveys conducted by private employee benefits consultants show a decline in the proportion of pension plans that are integrated; (10) Bureau of Labor Statistics data show that the percentage of participants in large and medium private firms covered by integrated defined benefit plans declined from 62 percent in 1986 to about 51 percent in 1995; (11) it is unclear whether the TRA86 integration changes are working as intended, in part because plan sponsors can use the general test to avoid the special integration provision restrictions; (12) according to IRS officials, the TRA86 changes clearly prevent plans from eliminating employees' pension benefits through integration if they adhere to the TRA86 integration provision; (13) however, they acknowledged that a plan whose integration formula exceeded the integration provision restrictions could remain qualified by passing the general test; and (14) neither the actuaries nor the benefit rights advocate GAO contacted were able to provide any specific examples of benefits being eliminated by integration, and GAO found no examples in the literature it reviewed.