Employers in the pension obligation

Since 1 January 2002, all employees subject to pension insurance have the right to deferred compensation within the framework of a company pension scheme (bAV). Practically every employer must therefore deal with this issue in his own interest and in the interest of his employees and look for ways of implementing it in the best possible way.
In 1984, then-Federal Minister of Labor and Social Affairs Dr. Norbert Blüm proclaimed, “Pensions are safe.” However, most of the contributors, i.e. employees and employers, who heard this good news a good 20 years ago, did not realise that they themselves would later be responsible for keeping this promise. Today, everyone has known for a long time that the statutory pension funds are empty. The raising of the retirement age to 67 will not change this. This means that employers and employees must work together to find occupational pension solutions and build up capital for old age. The earlier this is started, the lower the savings contributions required. The employer is always the responsible party, even if the company pension scheme is handled by others. As a result, the employer is liable for everything, including the mistakes of the insurance industry and agents. This is because the law states: “The employer is responsible for the fulfilment of the benefits promised by him even if the implementation does not take place directly through him.” (Section 1 (1) sentence 3 of the German Occupational Pensions Act, BetrAVG) The sole responsibility of the employer is derived from this. The law provides for five ways of implementing a company pension scheme: the tried and tested direct insurance, which is usually still available in companies and has been equivalent to the Pensionskasse since 1 January 2005, the pension fund, the pension commitment and the support fund. Each implementation method is listed individually in the Income Tax Act. As a result, there are two alternatives to choose from, which differ in the details of their design: Either the employer takes out a pension insurance policy for the employee (direct insurance, pension fund, pension fund) or he gives the promise of a pension benefit without taking out a pension insurance policy with a third party (pension commitment, support fund). In all cases, there are different implications for the employer and the employee in terms of taxation and social security obligations.
taking out an annuity policy
The essence of direct insurance, as the name suggests, is that the employer takes out a pension insurance policy with an insurance company for the benefit of the entitled employee and regularly pays the contributions due to this. A Pensionskasse is a pension institution that is also an insurance company and allows defined contributions in addition to defined benefits. Riester subsidies are also available under the Retirement Savings Act (AVmG). However, these Riester subsidies are only permitted for direct insurance, the Pensionskasse and the Pensionsfonds. Regular contributions are paid in, which are invested by the pension fund according to the rules of an insurance company. The pension fund is a pension institution in the legal form of a joint-stock company or an association, where the benefits are provided as a life-long pension or in the form of a payout plan with residual annuity. In contrast to an insurance policy, fixed premiums are not matched by guaranteed benefits except for a minimum benefit (complete dependence on the return generated) or, conversely, no fixed premiums are promised for guaranteed benefits. The contributions can also be invested relatively freely to a large extent in shares. Tax treatment and social security obligations are handled in the same way for direct insurance, the Pensionskasse and the Pensionsfonds.
Consequences for the employer:
– The contributions to the direct insurance are fully deductible as business expenses. – Savings of the employer’s contribution to social security, insofar as the contribution is also exempt from social security for the employee. – Without Riester subsidies, the annual contribution is tax-free up to a maximum of four percent of the income threshold for pension contributions plus 1800 euros. – Until 2008, contributions up to four percent of the BBG are exempt from social insurance, while the additional 1800 euros are subject to social insurance. Overall, however, all contributions from deferred compensation will be fully subject to social security contributions from 2009 onwards. In the case of employer financing, the social security exemption will continue to apply beyond 2008. – With Riester subsidies, the total contribution is always fully taxable and subject to social security contributions. In return, the employee receives the allowances under the AVmG or can claim the special expenses deduction.
Consequences for the employee (pension phase):
– The pension is fully taxable (deferred taxation). – The full contributions to health and long-term care insurance must be paid.
pension benefit commitment
– In the case of a direct commitment/pension commitment, the employer grants the employee a direct, possibly defined contribution, benefit commitment. There is no third party such as an insurance company or association interposed. In principle, the options for structuring such a commitment are completely free. Since the employer enters into an obligation for the future, he must “save” for this, i.e. form provisions which are also recognised for tax purposes when he draws up a balance sheet. The risk that the provisions are not sufficient to pay the promised lifelong pension, for example, is borne by the employer.
Consequences for the employer:
– Provisions must be formed in the commercial and tax balance sheets. – The contributions to any reinsurance are fully deductible as business expenses. – Capitalization of the business plan coverage capital or, if applicable, the surrender value of the reinsurance in the commercial and tax balance sheet. – Savings of the employer’s contribution to social security, insofar as the contribution is also exempt from social security for the employee.
Consequences for the employee (accumulation phase):
– The contributions are exempt from payroll tax for an unlimited period. – Insofar as the contributions are employer-financed, unlimited social security exemption applies. – Insofar as contributions are paid from deferred compensation, the exemption from contributions only applies to contributions up to four percent of the income threshold for pension insurance and only until 2008. As of 2009, the full contribution obligation applies. – Riester subsidies under the AVmG are not possible.
Consequences for the employee (pension phase):
– The pension less allowances (in particular pension allowance) is fully taxable (deferred taxation). – The full contributions to health and long-term care insurance must be paid. – In the case of the provident fund, the employer grants the employee a defined contribution benefit commitment, if applicable. The provident fund is usually a registered association, a foundation or a limited liability company which takes over the processing of this benefit commitment from the employer, i.e. also pays out the subsequent benefits. During the active period, contributions are made to the provident fund, whereby the employer is not bound to a specific “savings plan”. Depending on his economic situation, he can pay in more, less or even nothing at all within the framework of maximum tax limits. In most cases, you will find a reinsured provident fund on the market. A special topic is the lump-sum funded provident fund. This is because the provident fund can grant a loan to the employer in this case.
Consequences for the employer:
– The contributions to the provident fund are deductible as business expenses to a limited extent. This need not be a disadvantage, however, because a top-up can be made at retirement age. – In the case of a reinsured provident fund, however, the reinsurance contributions are fully deductible if they are paid continuously in the same or increasing amounts until the insured event occurs. – Savings of the employer’s contribution to social security, insofar as the contribution is also exempt from social security for the employee. The tax and social security consequences for the employee are the same for the provident fund as for the pension commitment.
John Fiala
(Die Fleischerei 4/2007, 92)
Courtesy ofwww.holzmannverlag.de.

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About the author

Dr. Johannes Fiala
PhD, 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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