Liability trap time value account

DSWR (Issue 4, 2006, pp. 98-100)
*by Johannes Fiala, lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), certified financial and investment advisor (A.F.A.), EC expert (C.I.F.E.), banker (www.fiala.de)
On the risks for finance , tax advisors and employers Time value accounts and the models of partial retirement are increasingly advertised by financial sales. The financial intermediaries are mostly concerned with commissions: Few intermediaries are aware of the civil and criminal liability risks for tax advisors and the management of employers.
No company pension scheme This is not a way of implementing the company pension scheme. Rather, it is a matter of ‘gross savings’ by the employee, whereby an ‘incident’ can occur at any time, which then triggers payment as a salary. It is also particularly important to realise that during the savings phase the employee’s entitlements are aged ? only the due date is postponed: under social insurance law, only if the statutory requirements of the working time account model are fully implemented does a ‘phantom wage’ with an immediate obligation to pay contributions arise as an exception.
Necessary insolvency protection Insolvency protection is prescribed by law in §§ 23 b, 7 d SGB IV for the time value account and in § 8 a ATG for partial retirement. This also includes the employer’s social security contributions. From this, specialist authors correctly deduce that (also partially) unprotected credit balances lead to criminal liability under § 266 a StGB ? not to mention the personal liability of the employer’s management for the levies. With the fiscal adviser then instigation, aiding and abetting and/or complicity are touched ? last but not least, he is often in a guarantor position within the meaning of § 13 StGB.
Insolvency models involving liability In practice, a wide variety of arrangements are offered by financial intermediaries. Pledging, as well as various trust models to protect the value credits in the event of insolvency, are particularly prone to liability. Thus, company inspectors comment that more than 90% of the models on the market are incomplete. For the tax advisor and the employer a catastrophe, because depending upon responsibility of the involved ones a retroactive interest (with monthly 0.5% and/or 1%) threatens, computed from the wrongfully not transferred contributions to the social security.
Incomplete pledge model Even renowned insurance companies have a “standard pledge agreement” available for employers and employees. This agreement is supposed to secure the assets ? the law stipulates that the amount of the gross salary waiver plus the employer’s social security contribution must be covered. However, the pledge always only covers the employee’s net claim to payment in the event of a disruption: wage tax and social insurance are not covered. It is important to understand that the pledge is accessory, i.e. it presupposes a principal claim ? and this only exists for the employee in the amount of the net sum.
Apart from that, very few models provide for the employee to be continuously informed about the amount of his claims ? in the event of insolvency, he can therefore in fact not even realise the pledged property on a pro rata basis if he is unable to present and substantiate the extent of his claim for payment in concrete terms.
Already this unsuitable attempt of an insolvency protection can lead to surprising reactions of the own pecuniary loss liability insurer for the consultant in case of damage: Because the offence against clear legal norms ? also the StGB – is considered as so-called ?knowing obligation injury?, with which the obligation to indemnify of the own VSH insurer is excluded in all rule.
Sketchy trust models artists legal design, support for years the financial sales by advertising with a supposedly bomb-proof trust solution. Regrettably, the only accusation of fraud in the objective facts of § 263 StGB appears to be absolutely certain. Finally, advisors, employees and employers are also being misled here by full-bodied promises of insolvency protection. It is regrettable that the trustees involved are mostly honorary professionals: In the practice of the criminal courts, they will hardly be able to successfully invoke an error of fact or prohibition.
Prohibition of disposal after insolvency application Normally, the insolvency court will issue a so-called prohibition of disposal immediately after receipt of the insolvency petition, section 21 InsO. Then the employer as debtor may no longer make any dispositions, and certainly not have them made by a trustee. Any dispositions nevertheless made, such as cash payments, would be ineffective, §§ 81 f. InsO. Not very talented lawyers in the service of several providers of working time accounts believed that this situation could be circumvented by transferring the reinsurance of the working time account (e.g. funds, fixed-term deposits) to the trustee (as the new owner of the reinsurance) “in the event of insolvency”: however, the Reichsgericht (Imperial Court of Justice) decided as early as the 1930s that such arrangements are invalid. The Federal Labour Court and the Federal Supreme Court have long since confirmed this legal opinion. The trustee therefore has hardly any legal possibility of disposing of the employees’ valuable assets.
End of order according to the InsO The opening of the insolvency is recorded by the court with date and time. The legal consequence is that all mandates and agency agreements (also of a trustee) end at the same moment, §§ 115 f. InsO. If a Trustee would therefore still dispose of the assets, it would act without mandate. It should only be pointed out in passing that no honorary professional can be appointed to such a position – leading the business as trustee, as it were? situation, can obtain insurance cover on the market. Uninsurability is the reflection of a considerable risk situation.
Trustees in collision Renowned insurance companies for property damage liability of honorary professions point out that a collision will lead to the loss of insurance coverage. For tax advisors it is in the professional code of conduct, for lawyers it is also in the penal code. In most cases, the trustee has already participated in the development of a trust solution on behalf of the initiator or product provider: a later order by employers and/or employees would not be compatible with this. The honorary professional is in a similar position in the CTA model, a two-sided trust in which the employer and employee function as the trustee’s clients. If the employer falls into insolvency, an insolvency administrator will demand from the trustee not to dispose, so that first of all it can be checked whether counterclaims exist against the employees? which could then be offset, § 394 BGB. If the employee, possibly also the (former managing) partner, nevertheless insists on payment and settlement vis-à-vis the trustee, the conflict of interests becomes apparent. For the criminal liability and a possible nullity of trust agreements, however, already the abstract endangerment is sufficient.
Pledging of bank balances without effect For the reinsurance of time value accounts, fixed-term deposits or open investment funds in a custody account of the employer, for example, come into question. It is not uncommon for a deposit or time deposit account to be set up with the employer’s bank. The hook of this organization is to be found in the AGB of the banks: Already with the opening of accounts and deposits the terms and conditions are included ? and these state that first of all a lien is granted to the bank or savings bank. If the employer has any debts with the bank, then the subsequent pledge to the employee often runs economically and legally into the void. As practice shows, this consideration applies analogously to the pledging of reinsurance in connection with a pension commitment.
Zillmerungshaftung Also with the time value account the mediator is interested in securing its incomes by corresponding product suggestions. If, for example, a life insurance policy is chosen as an investment, the surrender value available in the first few years will be low due to zillmerisation (a burden on the policy with administrative costs in the first few years, amounting to 7% or more of the sum contracted). Even when investing in open-ended investment funds, the investment risk can be noticeable for the employer due to price losses and charges. Few product providers make reference to the employer’s default liability: more decisive, however, is the question of whether the tax auditor will later still recognise the model, both from the point of view of the extent of existing assets and of insolvency protection.
For consultants and employers, obtaining binding information from the health insurance companies in accordance with § 28 h of the German Social Security Code (SGB IV) is not only an option, but also an obligation, so to speak, in order to be able to counter contrary views in the event of a subsequent tax audit. In dealing with the tax authorities, it is not sufficient to call for information in accordance with § 42 e EStG, because this only applies to the phase of withholding taxation of wages at the employer’s: here, if necessary, binding information must be obtained in accordance with the AO.
Restructuring by bail guarantee The bail insurance with guarantee is hardly offered by intermediaries: In this case, a financial intermediary guarantees in particular the employee, including the payment of possible social security and taxes. For the employer, this represents an effective instrument of internal financing, because only about 20-30% of the total credit balance needs to be secured, depending on creditworthiness. The costs of the guarantees usually amount to an annual 1.5-2% guarantee commission: for the company, the model then resembles a lump-sum funded provident fund (U-Kasse), but often on much more favourable terms. The commission of the intermediary is about 10% of the guarantee commission ? this is so little that few intermediaries want to deal with it straight away.
For the occupational pension consultant or the fee-based consultant, this product is suitable for customer retention. But be careful, on the market there are also guarantee models with trustees ? and precisely these can involve the greatest risks for the financial services provider, always including an invitation from the public prosecutor and criminal court.
Liability instead of guarantees While some product providers misleadingly advertise with a “time account reinsurance with guarantee”, experts know that despite “guaranteed interest and profit participation” a considerable additional risk of the employer remains. The legal gaps and questions to the insolvency protection force the fiscal advisor after constant higher-judicial iurisdiction to the delegation to a legal advisor. The tax or business advisor also owes the client an unsolicited explanation in this respect, just as every insurance broker has to point out his (also criminal) liability to the employer. For the GGF the situation is precarious, because here the so-called Mangerhaftung often comes to bear: This requires particularly careful organization, but also without orientation at the commission interest.
Solution approach to the order of thought Whoever deals with deferred compensation or working time accounts should be aware that it is about the employees’ money, i.e. their ‘earned’ property, their wages. Property, the wage. Whoever determines the ?implementation method and the tariff? here as an employer (as an employer or as an intermediary) is, as it were, dealing as a trustee with someone else’s assets. To burden this by provisions and administrative costs can lead all contracts to the (partial) nullity. It is exciting that not only the contracts with the employee can be affected, but also all investment contracts: After all, it is usually a bundle of contracts in which mutual reference is made to each other. The genuine fee-based advisor can avoid these problems more easily.

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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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