Company pension scheme: New billion-dollar liability of the insurance industry

“My friends wanted to be firemen, farmers, policemen, or something like that. Not me, I just wanted to steal other people’s money.”

(Warren Oates as John Dillinger in Dillinger, USA 1973)

Marketing concepts often form the basis of employer consulting by insurance companies. Not infrequently these lead with the implementation first with the employer and then with the insurer as designer straight to the liability for damages. Up to 99% of all insurance solutions in occupational pension schemes (bAV) are apparently designed to be tax-damaging for employees and employers. Only if the employer or insurance client is a tax advisor can the liability for damages of the insurer or carrier of the baV be limited (BGH of 20.03.2008).

New BFH ruling

In its ruling of 11 December 2008 (Ref. VI R 9/05), the Federal Fiscal Court decided that in the case of a (group) accident insurance policy taken out by the employer, without any legal entitlement on the part of the employee, the payment of premiums alone does not constitute remuneration for work. This is similar to the usual treatment of occupational pensions, for example in the case of provision via a provident fund.

If such insurance is structured as “insurance for the account of others”, only part of the insurance benefits must normally be taxed as salary for the employee in the event of benefits. At most, the pro rata sum of the contributions paid is taken into account. A further tax reduction for the employee results from the fact that these premiums can be immediately offset as income-related expenses when insuring solely occupational risks.

If a professional risk (e.g. occupational accident, occupational disease) was insured in addition to the private risk (e.g. disability or occupational incapacity), a tax reduction results from the fact that 50% of the premiums may be immediately deducted from the pro rata premiums as income-related expenses in the event of benefits. If the insurance benefit is paid as a life annuity, a distinction must be made between the ongoing consumption of capital from the notional lump sum at the start of the annuity and the ongoing income, for which the income share must also be taxed. The taxation of the share for the consumption of capital, on the other hand, is limited at most to the contributions paid in, insofar as they do not relate to occupational risks.

Tax disadvantages due to typical direct commitments or in pension commitments

If the employee receives a direct commitment from the employer with a legal entitlement, the commitment is initially tax-free. However, the employee must later pay tax on the full disability, accident or occupational disability pension as current salary. Insurers’ occupational pension consultants regularly fail to point out this tax disadvantage, and have thus for decades run into avoidable liability for their typical marketing advice. Only if the insurance benefits exceed the current salary can there be a partial tax-free compensation pension in individual cases. Most recently, the renowned specialist author for tax law, Dr. Otto, published that the employer’s duty of care requires in particular that the disability protection is therefore not included in a direct commitment, but rather that it is structured as a considerably more tax-efficient “insurance for third-party account in accordance with §§ 172 II, 43 II VVG”.

Insurers are liable on the basis of their own duty to advise according to case law

If one follows the expert comments on the employer’s duty of care, it follows that probably over 99% of employers were simply denied the alternative to the readily sold occupational pension solution, i.e. the insurance solution without legal entitlement. The tax loss for the employers and employees concerned has been increasing daily since the establishment of the occupational pension scheme. Employers should take this as an opportunity to put their in-house occupational pension solution to the test. Although insurers often claim that they are also competent in tax matters, anyone who relies on this as an employer or intermediary quickly finds themselves liable. According to experts of an insurance industry magazine, practice shows that already about 96% of all software consulting calculators do not provide correct results.

Insurance solution without legal claim

Now each employer can ask itself the question whether also with a retirement pension arranged in such a way the later granted capital compensation (with annuity payment naturally analogously the capital consumption apart from the profit portion taxation) would be subjected then also only to the height of the wage tax, as for it contributions were paid. The gain – lump-sum settlement minus contributions paid – would remain completely tax-free. It is not without reason that expert author Dr. Otto emphatically reminds us of the employer’s duty of care, because the classic occupational pension concepts can be massively disadvantageous and liable, and therefore also require that alternative occupational pension schemes be taken into account, so that in the end the employee or managing director receives the highest possible net benefit.

Early remediation protects against growing disadvantages

Many insurers have not informed and trained their intermediaries about alternative arrangements. Thus, the industry has also failed to date to bring legally possible completely tax-free insurance concepts onto the market as an even more flexible replacement for the previously tax-free endowment insurance. The legal and tax advice provided by insurers and their employees initially appears to their own customers as a free service – later this often turns out to be evidence of wishful tax thinking and incomplete bogus competence. This also includes the typical sample forms as provided by insurance distributors for employers.

Occupational pension as a publicity stunt

The legislator wanted to regulate occupational pensions in order to do something good for employees. For the employer, on the other hand, it envisages increasing liability, uncertainty, administrative burdens and even the threat to his existence through insolvency. It is not only in terms of taxation that the solutions are often very inflexible for the employer. Due to the portability of the pension and the vesting, even the binding effect of an occupational pension is questionable. Given the existence of better, more flexible solutions – not just the option mentioned – employers should ask themselves whether it really has to be something covered by the Company Pensions Act if they want to do something good for their employees and the company. Is it desirable to voluntarily subordinate oneself to legal framework conditions that were never established to protect companies and employers and have been tightened up again and again by legislators and case law? Just because there is a law on the subject, there is no need to take it up as long as there are better alternatives – after all, no one reads the penal code to choose the crimes they want to commit. In hindsight, you wonder why you thought something was a good idea before.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.kommunalverlag.de (published in Kommunalwirtschaft 07-08/2009, pages 515-516)