Obscure Tax Law Unfairly Limits Retiree Benefits

Charles W. Jones, International President Emeritus

Section 415 of the Internal Revenue Code unfairly reduces pension benefits for many Boilermaker retirees

Imagine this scenario: You open a savings account and put money into it from every paycheck so you'll have something for your retirement. Every time you get a raise, you increase the amount you save. Pretty soon you've got a nice little nest egg, but you keep working hard and saving money because you want to retire earlier than most people do. You work at a dangerous, physically demanding job that takes its toll on your body, sometimes putting in 60 to 80 hours a week, and you can't keep working that hard into your late 60s when Social Security becomes available.

At 60, you decide to retire. You've been working for more than 40 years, and you deserve to relax for a change and live off the savings your hard work made possible. You've figured it out. Based on living an average lifetime and the current earning rate for your savings account, you can withdraw enough each month to live comfortably the rest of your life.

But when you go to your bank, you get a shock. The banker tells you that the Internal Revenue Service has a rule for people who retire before 65. They won't let you take out as much as you want to take out each month. You'll have to live on a smaller amount.

"But that's my money," you say. "I worked hard for it, and any actuary in the country will tell you that what I want per month is a reasonable amount, based on how much I have in the bank."

"Sorry," the banker tells you. "Section 415 of the federal tax code sets the limit regardless of how much is in your account."

Does this scenario seem far-fetched?

It isn't. Section 415 doesn't affect bank account withdrawals, but it may limit your pension benefits. This law puts a cap on the amount a retiree can draw from a multiple-employer pension plan, such as the Boilermaker-Blacksmith National Pension Trust.

Under Section 415, the amount you can collect in pension benefits may be limited by the average of your three highest-paid years. Benefits may also be reduced if you want to retire before the Social Security retirement age or if you are collecting from another pension.

These limits apply regardless of how much money the plan says you should get. They apply regardless of how much money has been paid into the Boilermaker-Blacksmith pension on your behalf.

Not all Boilermaker retirees are affected by this rule. But if you have accumulated a lot of money in your pension fund or if you plan to retire early, it may affect you.

Under Section 415, your retirement benefits cannot exceed the average of your three highest-paid years. If you've been working as a Boilermaker for a long time, you probably have quite a bit of money in your pension account, even if you have had some years without much work. We intentionally negotiate high hourly pension payments in our contracts because we know that construction work is not always available.

But under Section 415, you might not be able to collect all you are entitled to, because the average of your three highest-paid years is low.

Section 415 may also affect you if you retire early. Our pension board just announced an improvement that allows you to retire at 59 with full benefits if you have 30 or more years of service. With 25 years, you can retire with full benefits at 62. That is only fair. Boilermaker work takes a toll on your body.

But Section 415 reduces pension benefits for many people who retire before the Social Security retirement age. Retiring earlier not only reduces your Social Security benefits, but it may also reduce your Boilermaker pension because of Section 415. That is just plain unfair to workers who have put in many years in a difficult, dangerous trade.

Likewise, if you had other jobs long enough to collect a pension from them, Section 415 may limit your income. Section 415 doesn't save the federal government money; it governs private pension plans. It doesn't protect pension funds. Our fund doesn't need protecting; it is in excellent shape. All it does is reduce your retirement income.

As bad as it is, Section 415 was not created to punish workers. It was intended to limit some of the questionable "golden parachute" schemes that corporate executives were giving each other. But regardless of its intent, it is now a bad law that unfairly deprives workers of retirement money they earned through hard work.

Fortunately, bad laws can be fixed. Earlier this year, with strong urging from the Boilermakers and other Building and Construction Trades unions, U.S. Representative Robert Portman (R-OH) sponsored a bill to revise Section 415. More than 115 representatives cosponsored the bill. In the Senate, Frank H. Murkowski (R-AK) sponsored a similar bill.

Neither bill has passed, but both the Senate and House have incorporated the language from these bills into their tax bills. In some form, that tax bill will pass and be signed by the president. As soon as the president and Congress can agree on the details, that bill will become law. We need to make sure that the language revising Section 415 doesn't get cut out of this bill during their negotiations.

We have a lot of support on this bill, from both Republicans and Democrats. People who usually oppose us, like John Boehner, Cass Ballenger, and even Dick Armey, are with us, alongside many of our long-term friends, such as Jim Traficant, Marcy Kaptur, and David Bonior.

The time is right. We can get this injustice straightened out.

But we must be vocal. We need to make phone calls and write letters. Contact both of your state's senators as well as your congressman and let them know we want to see Section 415 reform this year.

Section 415 is unfair to workers. We must change it.