Until December of last year the corporate income tax rate had remained unchanged for almost 25 years, since President Bill Clinton's first budget, the Deficit Reduction Act of 1993. This most recent change offers a potential present to many corporations from the U.S. government.

The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, reduced the corporate tax rate to 21% from 35%. Since contributions are tax deductible, corporate defined benefit plans with calendar tax and plan years have until September 15 to take advantage of 2017's higher deductible allowance. In addition, the Pension Benefit Guaranty Corporation (PBGC) variable rate premium, once as low as 0.9% of unfunded, vested benefits for corporate defined benefit plans, has climbed to 3.4% in 2018 and is expected to rise to 4.2% in 2019. In light of the changes to the tax law and potential to offset rising PBGC premiums, corporate pension plans would be wise to thoroughly evaluate their future contribution plans and goals.

What are the economic benefits of contributing in fiscal year 2017 rather than fiscal year 2018? Let's view this unique opportunity through the lens of a pension plan of a hypothetical company:

  • Market Value of Assets: $85 million
  • Market Value of Liabilities: $100 million
  • Funded Status: 85%
  • Plan Participants: 2,000
  • Contribution Amount: $1 million

Net Savings of a $1 million Contribution for the 2017 Plan Year vs. 2018 Plan Year: $178,000 (~IRR = 25%)

A potential high double-digit return from contributing to the plan in fiscal year 2017 rather than fiscal year 2018 should lead corporate plan sponsors to ask themselves: “Can I get a better return on my capital elsewhere?" If the answer is “No" or “I don't know," perhaps an expedited pension contribution schedule is worth a second look.

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