More Than $6 Billion in Additional Pension Contributions Made Since Tax Reform

Although increasing pension contributions was not a primary consideration in the decision to lower the corporate tax rate in the Tax Cuts and Jobs Act, it is a positive unintended consequence.

The Tax Cuts and Jobs Act of 2017 resulted in firms contributing 23.8% more, or $6.6 billion additional funds, to their pension plans last year, according to a report from the Wisconsin School of Business.

The increase was due to a key provision in the bill that lowered the corporate tax to 21% this year and thereafter, from 35% last year, giving companies an incentive to accelerate tax deductions, as those contributions would be deducted at a higher rate.

The Wisconsin School of Business’ estimate is based on a review of 414 firms with pensions that increased their pension contributions by $16 million each.

“Even though the law incentivized increased corporate contributions to defined benefit [DB] pension plans, there were some tax practitioners cautioning firms to assess their cash needs before making those contributions to avoid losing out on investment opportunities,” says Fabio Gaertner, assistant professor of accounting and information systems at the school. “There was also some thinking that internal financial constraints might prevent firms from making increased pension contributions in 2017.”

The researchers said they were able to identify additional corporate pension plan contributions because, under the generally accepted accounting principles (GAAP), firms must disclose their expected pension contributions a year ahead in their annual 10-K reports. To draw their conclusions, the researchers compared the firms’ 10-K reports from 2016 and 2017.

The researchers additionally looked at how the tax reform affected taxpaying and non-taxpaying firms. Firms with positive federal taxable income stood to benefit the most from the deductions, the researchers said. Taxpaying firms made additional pension contributions in 2017 that were 6 1/2 to 12 times larger than non-taxpaying firms.

The authors also said the firms that stand to lose the most from deferred tax asset write-downs for GAAP accounting purposes related to their pensions are the primary contributors. They said this is consistent with the financial reporting incentives that are related to the corporate rate reduction also playing a role in the decision to make additional pension contributions in 2017.