The end of double contributions to company pensions – or not?

In recent years, there has been regular criticism of the double contribution of company pensions – from those affected, from professional associations, but also from politicians. Finally, the double contribution rate considerably reduces the attractiveness of occupational pensions. This is where the Act on the Introduction of an Allowance in the Statutory Health Insurance Scheme to Promote Occupational Pension Provision (GKV-Betriebsrentenfreibetragsgesetz) has now taken effect since the beginning of 2020. We summarize for you in our Client Alert the main effects of the new law from the perspective of your company and your employees.

1. What is it about?

In the public discussion, the term “double contribution” is used equally for two different situations. On the one hand, there are cases in which both the contributions to the company pension plan and the benefits that are paid out later are burdened with contributions to health and long-term care insurance – a true double contribution. On the other hand, this also generally refers to constellations in which the expenses for the company pension remain non-contributory for health and long-term care insurance, but the full health and long-term care insurance contributions are then levied on the benefit – rather a “full contribution”.

Full contribution rates were introduced by the GKV Modernization Act as of 2004. Until then, company pensioners only had to pay half the health insurance contribution; only the (much lower) contributions to long-term care insurance had to be paid in full by company pensioners. This change in the law has eased the burden on health insurers and placed a corresponding burden on company pensioners – by approx. EUR 3 billion annually.
Recipients of low occupational pensions were exempt from the obligation to pay contributions: Pension recipients whose total occupational pensions did not exceed 20% of the monthly reference amount according to § 18 SGB IV (in 2020, this corresponds to EUR 159.25 per month) were exempt from the obligation to pay contributions (so-called exemption limit).

2. What was changed?

On January 1, 2020, the GKV company pension allowance law, which the GroKo had agreed on in connection with the discussion on the basic pension, came into force. The aim of this law is to strengthen company pension schemes and make them more attractive for employees.

In addition to the exemption limit described above, the law introduces an allowance in the same amount: As a result, in future the health insurance contribution – albeit the full amount – will only be payable on the portion of the – total – company pension that exceeds this tax-free amount (in 2020, therefore, EUR 159.25 per month). As in the past, lump-sum benefits are recognized as a notional monthly pension for a period of 10 years at 1/20 of their amount.

In this context, the following should be noted:

• The new regulation does not apply to long-term care insurance. The previous situation remains unchanged, i.e. if the company pension exceeds the exemption limit, the full long-term care insurance contribution must be paid on the entire amount.
• The exemption limit and tax-free amount do not apply to voluntary members of the statutory health insurance scheme (or to privately insured persons).

3. What is the effect of the change?

The new law reduces health insurance contributions for all compulsorily insured company pensioners. For pension recipients whose company pensions are below twice the exemption amount (this is still 60% of the pensioners concerned), the new law even means a better position compared to the legal situation before 2004. After all, they now pay less than half the health insurance premiums when measured against their total pension.

Overall, the relief for pension recipients adds up to EUR 1.2 billion per year. This is, of course, at the expense of the health insurance companies. Their additional burden will ultimately be reflected in rising insurance premiums. Over the next few years, the shortfall in premium income will be compensated at least in part by the health fund (or, in 2020, by the liquidity reserve), namely in 2020 in full and in the years 2021 to 2023 at an evenly declining rate of approx. 75%, 50%, and 25%, respectively. The statutory minimum reserve of the Health Fund will be lowered for this purpose.

4. What must now be taken into account when paying out company pensions?

There are currently approx. 46,000 paying agents of company pensions – employers, insurers, pension funds, etc. These paying agents must take the new allowance into account when settling occupational pensions.

In the future, the paying agencies must notify the health insurance funds that the payment is a pension payment for which the new law is relevant. The health insurance fund then checks whether the pensioner receives relevant pension payments from several paying agencies (“multiple payments”). In the event of multiple payments, the health insurance fund determines whether and to what extent the tax-free allowance applies and reports this to the paying agencies concerned. For single pay, which is approx. 70% of company pensioners receive, the paying agent itself is responsible for the correct determination of the allowance.

A circular from the GKV-Spitzenverband (RS 2019/734 of Dec. 20, 2019) details the deduction of the allowance. In principle, the allowance is to be deducted from the income subject to contributions before a possibly relevant limitation to the income threshold for health insurance contributions. The amount thus reduced shall be used to determine the health insurance contribution. For the long-term care insurance contribution, the previous regulation remains in force, i.e. it must be checked whether the company pension exceeds the exemption limit.

It is expected that health insurance companies will have implemented the technical requirements for reporting multiple payments by October 1 of this year. For so long, most retirees are overpaid health insurance premiums, which necessitates a subsequent refund. We recommend proactively informing company pensioners about this, as otherwise numerous inquiries and complaints can be expected.

5. Does this mean the end of double contributions to company pensions?

The new law ends the full contribution to the statutory health insurance for most company pensioners. However, the problem of double contribution is not solved. For Riester contracts in the context of company pension plans, the Act to Strengthen Company Pensions put an end to double contribution; for privately continued direct insurance and pension fund contributions, the Federal Constitutional Court has declared double contribution unconstitutional (Ref. 1 BvR 100/15, 1 BvR 249/15, 1BvR 1660/08). However, there are still cases in which both the payments made to build up the company pension plan and the resulting benefits are subject to mandatory contributions to health and long-term care insurance:

• No health and long-term care insurance contributions are levied on contributions from deferred compensation in favor of direct insurance and pension fund contracts that are taxed at a flat rate in accordance with Section 40b of the German Income Tax Act (EStG) unless they are paid from one-time payments (such as the Christmas bonus).
• Genuine own contributions to the company pension scheme, which are provided for in some pension schemes, are paid out of net income and are therefore subject to health and long-term care insurance contributions.
• Under the BRSG, contributions to a direct insurance policy, a pension fund or a pension fund remain tax-free for the employee up to 8% of the income threshold for pension insurance contributions (BBG). However, only an amount up to 4% of the BBG is also exempt from social security contributions.

Nevertheless, in all these cases, the resulting occupational pensions are subject to mandatory health and long-term care insurance contributions.

6. Conclusion

All’s well that ends well? Of course, the new law is a step in the right direction. At the same time, there remains a need for further improvement:

• People with voluntary health insurance are excluded from the improvements. This is still approx. 2.7% of pension beneficiaries.
• The different assessment basis for health and long-term care insurance is impractical.
• There are still cases of genuine double contribution to occupational pensions.

We look forward to talking with you about this and your other current topics.