If the boss drops out due to health problems, it can become critical for a GmbH, because often there is no occupational disability pension for managing directors despite pension commitments.
At present, the typical medium-sized GmbH is increasingly finding itself in a crisis situation because a managing director suddenly becomes incapacitated.
An isolated incident? No, because insolvency administrators observe that the occupational disability of the managing director has become an increasing reason for insolvency. But what are the causes and liability traps?
The pension commitment is a model for first of all saving taxes at the GmbH. But already in the case of old-age pensions, i.e. pure old-age pensions, it is little known that the necessary financial resources have to be about twice as high as they are taxable. This means that the company has to set aside profits and pay tax on about half of them. It is not uncommon for the agent to tell the client that there is no possibility of insurance for certain pre-existing conditions.
Later, disability kicks in and a new insurance agent does some research. It then emerges from various companies that the customer would in fact have been insurable after all. As a result, the former agent must now pay the disability pension. Furthermore, the provisions for a pension commitment are calculated on the basis of the so-called Heubeck mortality tables with an interest rate of currently 6.0 % p.a. net. For this to happen, however, an investment or an insurance policy would have to generate a gross return of around 10.0% p.a.. However, in the past and still today, the pension commitments were financed or reinsured with a German endowment life insurance policy, but the realistic return on German life insurance policies is currently only 4.0 % p.a. gross, i.e. 2.40 % net after taxes (tax rate 40 % of the GmbH). The missing financial means at retirement of the managing director must then be serviced by the GmbH from its own cash flow and this often until the end of life. In addition, a typical medium-sized company cannot afford it financially if a managing director becomes disabled. His occupational disability leads to financial obligations that lead straight to insolvency. Business economists speak of “incongruent reinsurance” if the managing director is entitled to an occupational disability pension in his pension commitment but there is no special reinsurance for this risk. Then in the case of damage the middle class GmbH must carry the financial expenditure alone.
In the past, however, an occupational disability pension was often included in the pension commitment, as this is an original field of business of the insurance companies. Good insurance premiums can also be earned in the process, often accounting for nearly 20% to 30% of the total premium for the insurance policy. This risk premium built into the overall contract has the disadvantage that there are insufficient funds available in old age for the savings portion of the insurance, which is needed to finance the old-age pension. In other words, if only 70 to 80 % of the savings portion flows into the reinsurance for the old-age pension, then the capital required to finance the pension is usually not available at the start of the pension. This is a vicious circle, because if the company cannot be financed, the tax office can possibly point to hidden profit distribution, which in turn can lead to insolvency.
In the best case, however, the GmbH has covered the risk of occupational disability with an occupational disability pension from an insurer, which is the case in approximately 90% of all pension commitments on the market. However, this is often where another drama begins, which of course the insurance agent usually doesn’t mention for business reasons. If the customer is healthy and the occupational disability pension is accepted by the insurer, then everything seems to be in order. However, many old pension commitments were based on an occupational disability pension benefit in relation to the statutory pension insurance, which used to be correct as long as an occupational disability pension was still available. However, this was dropped in the course of the changeover to the so-called reduced earning capacity pension and therefore there is no longer an occupational disability pension.
It is fatal for the GmbH and the GGF if there is a clause for the payment of an occupational disability pension in the commitment, but the GmbH is not allowed to pay the pension to the GGF for the aforementioned reasons. Every GmbH should urgently have this clause checked in the interest of its GGF and have it redrafted accordingly by an expert. In any case, it would be important to adjust the occupational disability pension to the current insurance conditions of the respective insurance company. This means that the GmbH is only obliged to pay a pension in the event of occupational disability if the insurance company also pays on the basis of the conditions, otherwise there is the threat of insolvency again. Not infrequently, a comparative calculation for tax optimisation of the burden is also missing. Two design errors are typical here, namely first of all that in the model calculation for the determination of needs it was simply overlooked that such pensions must also be taxed. The manager will then consider whether the model calculation was seriously flawed and he can claim the missing annuity to pay the tax from the insurance intermediary. In addition, it can be cheaper to cover occupational disability privately via a pure risk insurance, i.e. not via a pension commitment in the company. With nice regularity, such comparative calculations are prepared later by the tax advisor, as proof of loss. Some agents also overlook this task and fail to “fix” this liability trap.
However, the highest tax risk is likely to be the balance sheet risk in the case of premature disability benefits for the managing director. A relatively high disability pension as part of a pension commitment of a GmbH to the managing director is problematic in principle. In the event of disability, the GmbH is exposed to high risks, which are then generally to be covered by a reinsurance policy. Unfortunately, as a rule, invalidity cannot be established indisputably; moreover, it is linked to a large number of conditions. In the case of the disability pensions under discussion, the insurer very often does not initially recognise the obligation to pay benefits, which then often has to be enforced through legal proceedings. Furthermore, the difficulty arises that the conditions of the reinsurer and those of the pension commitment are difficult to reconcile. The theoretically possible reference in the pension commitment to the conditions of the insurer is problematic from a tax point of view because an independent definition of benefits is required here. Furthermore, even this does not necessarily protect against the following curiosity occurring in the end: In the event of disability, the employer (GmbH) must pay the disability pension under the contract between him and his GGF, whereby the insurer may successfully defend itself against this. In this case, the GGF would insist on his benefits with the consequence that the GmbH would have to provide a considerable amount of capital as cover for the disability pension. However, the GGF could possibly waive its claims.
However, this could be interpreted as unusual for tax purposes, with the result that the tax office would define a hidden equity contribution for him in the amount of the cash value of the disability pension, which is subject to wage tax. For these reasons, consideration should generally be given to keeping disability or occupational disability pensions out of a company pension commitment. This applies in particular if the GmbH is managed by several participating managing directors, so that the remaining partner in each case has to deal with this problem. An existing occupational disability pension could also be limited to the debit/partial value of the reserves. This has the advantage that the GmbH pays an occupational disability pension to the GGF in the event of a claim, but only on the significantly lower provision values at the time of the occupational disability. The balance sheet risk is then completely eliminated and the GmbH can usually cope with these pension payments without any problems. However, the pension commitment and reinsurance policy would have to be redesigned and the residual risk of disability would have to be newly covered by an inexpensive private occupational disability annuity with a good insurer. However, it should be checked in advance to what extent the new insurer covers the occupational disability risk on the basis of the existing health conditions. Only then should the existing contract be reduced or restructured.
A worthwhile story, if one considers that under circumstances alone by the balance jump risk often 200,000 to 300,000 euro reserves must be booked profit-reducing by the tax adviser into the balance, which can mean inevitably an insolvency for the GmbH.
Pension in court Recent rulings on the subject of occupational disability show that it is virtually impossible for a self-employed person (especially controlling GmbH shareholder-managing directors) to receive such a pension. A decision of 18 February 2005 by the Hamm Higher Regional Court, which has only just become known, dismisses the action brought by a restaurant owner against his occupational disability insurer (Ref.: 20 U 174/04). Reason: A self-employed person is only then incapable of working if there are no areas of activity open to him in his business in which he can still work to the conditional extent with his health impairment. The judges stated that in the event of a health impairment, a self-employed person was obliged to reorganise his business if necessary. In plain language: If a business has fields of activity which are still reasonable for the owner in terms of health, or if a reasonable reorganisation of the business would open up corresponding possibilities of activity, the court is convinced that this rules out a conditional occupational disability. B
reorganisation may have to take account of redundancies and the recruitment of other staff. Conclusion: According to the judges, the owner of a restaurant who can no longer lift and carry heavy loads or walk and stand for long periods of time is left with a wide range of employment opportunities, such as supervisory work.
Lawyer Dr. Johannes Fiala 80639 Munich Tel.: 089/17909035 Internet: www.fi ala.de
With friendly permission of
www. campingimpulse.de (published in campingimpulse 01/2007, 30)
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Dr. Johannes FialaPhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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