ONE OF THE WAYS in which the federal government encourages saving for retirement income is by granting significant tax advantages to employers who finance pension plans for their employees. A criterion for qualifying for tax exemption is that the plan distribute benefits fairly -- that there be no spectacular discrepancy between the treatment of officers of the corporation, for example, and rank-and-file workers. If a corporation were to fire employees to keep them from becoming qualified for benefits, the plan would lose its qualification and the employer's contributions would be subject to taxation. This has been the law since 1942.
Recently, a squall has blown up in this area, because a number of employers believed that a 1974 change in the pension statutes allowed them to avoid ever being subject to an investigation of how their plan operated if they adopted a standard known as "4-40 vesting." This procedure establishes that an employee attains a permanent right to receive 40 percent of his benefits after four years of employment, with additional percentages with each year of employment until 100 percent of the benefits are permanently his after 11 years. But the IRS began to note that in a number of corporations, the turnover among relatively low-wage employees was high, while the officers of the corporation stayed forever. Professional corporations -- doctors', lawyers' and dentists' offices -- are the prime examples. Nurses, receptionists and hygienists come and go, while the doctor is the only constant in the office. Under some plans, the effect is to lower the amount the employer has to pay in -- what he contributed for one receptionist who left after two years because her husband was transferred to Milwaukee would go to finance the benefits of all the rest. Under other forms, the accrued extra value, for all those employees who didn't stay long enough to qualify, goes to raise the benefits to those who do qualify -- the doctor himself. Under either form, it makes no sense. Tax benefits for these plans were established to make pensions available to the working force at large, not to provide yet another tax shelter for the already considerable income of the professional employers.
So the IRS has published a proposed regulation restating its intent to examine how pension plans actually function under the "4-40" rule, rather than taking it on faith that everything is fine. Outrage at the indignity of this IRS insult has been expressed by the professionals in the form of extreme pressure on Congress to overturn the proposed regulation even before it is published in its final form. Several bills have been introduced in the House to amend the Internal Revenue Code to keep the IRS from snooping around to see what is happening. And the panic is so great that there is some thought being given to outlawing such behavior in the Treasury appropriations bill.
We think the professional corporations protest too much. Although many are in good faith providing for their employees as well as they can manage, a number appear to have found themselves a very good deal -- at the expense of the rank-and-file workers who don't get benefits and of the taxpayers who are subsidizing the whole fandango. Enough.