Few taxpayers seem to understand that the IRS puts limits on annual pensions. For those retiring at age 65 the maximum annual benefit is $200,000 in defined benefit pension plans. For those retiring earlier, a real issue in the public sector, the limit falls lower.
The PressDemocrat.com explains the growing problem in Sonoma:
Sonoma County retirees who hit the federal limits in 2011 represent the new era of higher pensions. They include five of the 10 highest-paid county retirees, including Bill Cogbill, the former sheriff, and Mike Chrystal, the former county administrator.Both get annual pensions higher than the current Internal Revenue Service cap of $200,000 for defined benefit plans. Cogbill's pension is $239,311, and Chrystal's is $209,862.
Each year, taxpayers front the money that goes to those high earners after they've hit the federal caps in the form of checks out of the county general fund. Totals have ranged from $98,000 in 2009 to $161,000 in 2011. County officials said it could rise in the future.
Without reform, the pensions of more and more public workers in generous states like California, especially the pensions of well-paid city managers and schools superintendents and police and fire directors, will leap over the IRS limits, which tend to rise slowly over time, unlike some government pensions.
Steve, is this the only way to deal with the IRS cap? Connecticut has this problem and just realized it recently. They are negotiating with the IRS. I guess the state could be required to reimburse the pension fund for payments above the cap, but the state could just reduce its contribution accordingly. Not sure where that leaves us...
I don't not believe it is possible to pay this additional money out of a pension fund, even if the fund is then reimbursed for it. That's because the IRS rules are designed to insure that employers don't use a pension fund as a tax shelter for unlimited deferred income for executives. Typically states have been paying this additional cash directly out of budgets (see the SF police director example in my IBD op-ed), or establishing separate funds out of which they pay these claims.