Social security liability for direct insurance avoidable after all?

New ruling by the Hesse State Social Court (LSG)

Many employees with direct insurance policies that used to be taxed at a flat rate are annoyed that social security contributions are due again afterwards on the payment of their additional old-age pension.
As a result, for several years now the legislature has unexpectedly imposed on them a reduction in their life insurance benefits of around 16 percent. However, the LSG Hessen now shows how this can be avoided on the occasion of leaving the employer.

(Judgment of 18.11.2010, Ref.: L 1 KR 76/10).

 

Incorrectly designed private continuation of a direct insurance policy (DV)

Some employees have even continued their DP privately, and with some bad luck the former employer has remained the policyholder: In this frequent case of a design error , even on the privately paid and previously fully burdened with social security contributions this tax is due again on payment . This double burden with health insurance contributions is often overlooked on the occasion of leaving an employment relationship as a liability trap with the employee also by the advisors too gladly. Other employees allow the contract for their DP to continue without contributions, so that full social security contributions are due on it at the end. The prerequisite for this is that the payment is deemed to be intended for retirement provision.

 

Way out due to new LSG ruling: bridging instead of old-age provision

The new ruling of the LSG Hessen now opens up an elegant way out: to have the actuarial reserve (meaning simply the surrender value including the surpluses) paid out when leaving the previous employer for another reason, namely for the loss of the job, for example as a bridging measure, in any case never as old-age provision. Then the former employee saves the double social security contributions. Compared with this early payout, the continuation of a direct insurance policy until the start of the pension with the deduction of social security contributions is hardly worthwhile.

 

Applicability to pauchal taxed direct insurances

This case law is not applicable to pure deferred compensation. However, before a direct insurance policy is continued in the event of leaving the company – with or without contributions – with the disadvantage of a later obligation to pay social security contributions, it should always be checked whether the prior payment on leaving the company is probably the better solution. Particularly for older employees who leave the company prematurely, for whom the direct insurance would only have run for a few more years, the timely payout as a bridging measure will usually be the better option.

 

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

 

by courtesy of

www.juraforum.de (published on 18.05.2011)

Link to this article www.juraforum.de and

www.handwerke.de (published in Computers in Crafts, 08/09-2012)

 

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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