Tax Revenues Lost and Beneficiaries Inadequately Protected When Private Pension Plans Terminate

HRD-81-117: Published: Sep 30, 1981. Publicly Released: Sep 30, 1981.

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In response to a congressional request, GAO reviewed the effectiveness of the practices and procedures of: (1) the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation (PBGC) for ensuring that pension plan terminations are reported; (2) IRS for processing plan terminations; and (3) IRS for ensuring compliance with income tax requirements by individuals receiving pension benefits.

The review showed that, for about two-thirds of reported terminations, plan sponsors were not requesting IRS reviews at the time of termination because they are not mandatory under the Internal Revenue Code. Termination actions were not being reported to PBGC, which is responsible for insuring participants' benefits. Thus, at the time of termination there is no assurance that, for many such plans, the participants are adequately protected as required by the Employee Retirement Income Security Act and the Internal Revenue Code. IRS reviews of terminating pension plans requested by plan sponsors have not been effective in protecting participants' benefits, and IRS processes for collecting taxes due on plan asset disbursements are incomplete. Substantial tax revenues have been lost because IRS had not fully compared employer and employee tax reporting information on asset disbursements to individuals. PBGC and IRS have begun actions to correct some of these problems.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Congress has taken no action on this recommendation. Therefore, follow-up on this recommendation should be discontinued in accordance with the GAO Project Manual, in that GAO follow-up on recommendations to Congress should be considered satisfied when Congress has not acted on the recommendation in 22 months.

    Matter: Congress should enact legislation requiring plan sponsors to request an IRS determination for tax qualification of terminating pension plans before plan dissolution.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of IRS should use relevant reporting areas on individual tax returns, such as a reported rollover for computer matching with employer pension payout reports, to alleviate the need for manual reviews.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of IRS should determine for tax year 1982 the amount of pension payouts reported by employers as capital gains to employees and whether an effective method to compare such reporting with individual tax returns can be developed. If an effective comparison method cannot be developed, the employer reporting requirements of pension payouts as capital gains should be discontinued.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Executive Director of PBGC, in cooperation with IRS, should use the automated records of both agencies to identify nonreporters of plan terminations. In addition, the Executive Director should establish procedures for timely follow-up with potential nonreporters to ensure participants in terminated plans, entitled to retirement benefit insurance, are afforded the protection intended by Congress under ERISA.

    Agency Affected: Pension Benefit Guaranty Corporation

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of IRS, in cooperation with PBGC, should use the automated records of both agencies to identify nonreporters of plan terminations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of IRS should: (1) establish quality control procedures to ensure that termination applications approved contain all necessary data for making such determinations; (2) establish a level of turnover for reviewers to use in deciding whether to question participant departures before plan termination; and (3) identify documentation for reviewers to obtain when questioning possible discriminatory vesting, participant forfeitures, and questionable benefit distributions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commissioner of IRS should develop procedures for testing employers' filing compliance of pension payouts by obtaining, on pension plan annual reports, summary information on the number of payouts made above established dollar tolerances during the year to be compared with employer summary miscellaneous income reports.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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