For pension plan sponsors, voluntary pre-funding now looks more compelling than ever before, thanks to the recent tax reform legislation, which cuts the headline corporate tax rate for 2018.
Right now, a window of opportunity is open to lock in current tax deductibility of 35% for any plan contributions attributable to the 2017 tax year. Once that window closes, future contributions will need to be deducted at the new 21% rate.
Many sponsors considering pre-funding face a delicate balance between pre-funding for tax benefits and potentially crowding out future investment returns. While sponsors should optimize their tax strategy, they also need to guard against paying more than needed to fully fund the plan.
The necessity to coordinate pre-funding decisions with broader pension financial strategy is more critical than ever considering the 2018 decision.
For calendar year tax payers, the window of opportunity is fairly short (contribution deadline for most sponsors to apply old tax rates is September 15, 2018). Given the governance process involved in what could be sizeable contributions for many, we encourage pension sponsors to start this evaluation if they haven’t already.
Now is a great time to connect the dots fully between tax, investment and de-risking opportunities.