One thing is clear: The passing on of the saved flat-rate social security contributions in accordance with the legally obligatory employer subsidy for deferred compensation applies to all new deferred compensation agreements in the direct insurance, pension fund and pension fund implementation channels that are concluded from January 1, 2019. Following the expiry of the transitional period from January 1, 2022, this mandatory subsidy will now also apply to deferred compensation agreements under individual and collective law (“legacy commitments”) already concluded before 2019. Against this background, many companies are currently questioning the legal requirements for subsidies and any options for offsetting previous voluntary subsidies. We summarize the most important questions for you very briefly.
I. In the beginning was the Company Pension Strengthening Act – Basics
The amendment of the German Occupational Pensions Act (BetrAVG) by the Occupational Pensions Strengthening Act (Betriebsrentenstärkungsgesetz) on January 1, 2018 resulted in numerous innovations in occupational pension schemes (bAV).
Prominent and per se capable of bringing about the greatest changes, the social partner model should, as its centerpiece, provide a collectively agreed framework for the introduction of a pure defined contribution system without liabilities and guarantees on the part of the employer and provider for specific pension levels (pay and forget). Regular deferred compensation with opting-out clauses was also intended to broaden the scope of occupational pensions. However, the implementation of the model by collective agreement has not yet got off the ground due to a variety of hurdles.
Improvements to the “old” occupational pension world were introduced as a flanking measure. In particular, the tax incentives for occupational pension schemes were improved, e.g. in the subsidy volume of Section 3 No. 63 of the German Income Tax Act (EStG). The subsidy amount under Section 100 of the German Income Tax Act also introduced a new subsidy for employer contributions in favor of employees within a certain income limit.
Finally, the introduction of a legally mandatory employer subsidy for deferred compensation concluded or to be concluded as of January 1, 2019 was of great practical relevance for companies, providers and employees entitled to pension benefits.
The wording of the law in § 1a para. 1a BetrAVG reads literally: “The employer must additionally pass on 15 percent of the converted remuneration as an employer’s allowance to the pension fund, Pensionskasse or direct insurance insofar as it saves social security contributions as a result of the remuneration conversion.” This simple regulation continues to raise various questions in practice.
The employer’s social security contributions saved by the conversion-related reduction in pay subject to social security contributions are passed on as a subsidy for deferred compensation (Section 1 (2) No. 3 of the German Occupational Pensions Act (BetrAVG)) in a lump sum amounting to 15% of the converted pay. Alternatively, the employer can also calculate “pointedly”, i.e. pay the subsidy only in the exact amount of the social security contributions actually saved. Immediate vesting applies to the employer’s allowance.
For deferred compensation agreements already concluded before January 1, 2019, saved social security contributions must now also be passed on from January 1, 2022 (sections 26a, 1a (1a) BetrAVG). This means that the only exceptions to the obligation to pass on information are deferred compensation under the direct commitment and provident fund schemes.
The statutory provision is mandatory, i.e. it may not be deviated from to the disadvantage of the employees entitled to pension benefits. However, it is subject to the general clause opening up collective bargaining under Section 21 of the German Occupational Pensions Act (BetrAVG) and is thus dispositive of collective bargaining agreements.
II. That little bit of allowance can’t be that bad – can it?
From a legal point of view, the distinction between a new commitment to be subsidized and (still) an old commitment was controversial. Should it depend on the underlying collective-law regulation in the legal basis for deferred compensation (e.g. VO, BV, TV) or on the conclusion of the individual deferred compensation agreement by the individual employee at a downstream point in time? There are plausible arguments for both views.
For personnel policy reasons, many companies wanted to implement the subsidy uniformly for all employees from the outset, without differentiating between new and old commitments. In doing so, however, they encountered a variety of problems.
In some cases, providers no longer wanted to allow premium increases in existing contracts for reasons of collective bargaining. Particularly in the case of contracts with a high guaranteed actuarial interest rate, their interest was in rejecting the premium increase, as they were barely generating the guaranteed interest rate due to the ongoing low interest rate environment. However, the subsidy for a separate new contract may have been too low given collectively agreed minimum contribution limits.
Problems also regularly arose in the case of direct insurance policies and pension fund contracts taxed at a flat rate in accordance with Section 40b of the German Income Tax Act (EStG), because these tariff generations had usually already been closed and it was therefore no longer possible to increase contributions. This was to be expected, as the subsidy under Section 40b of the German Income Tax Act (EStG) was only available for endowment policies issued up to December 31, 2004.
Furthermore, the question arises as to how to deal with cases in which the employee’s deferred compensation already exhausts the social security-free contribution limit of 4% of the income threshold. In this case, without an alternative voluntary reduction of the contributions to the allowance, social security contributions are due, which must be paid by the employee and the employer.
The list of administrative and legal challenges could be continued for a long time. As a result, the uncertainties have so far prevented many employers from implementing a subsidy for old commitments ahead of time. The expiring transition period now forces action.
III. Adjustment to the existing pension commitments and review of further modification requirements
When dealing with the subsidy for old commitments, the supplementation of existing pension arrangements or the possible eligibility of other “voluntary” subsidies by the employer must be examined and structured in accordance with the legal basis applicable to the respective commitment.
If a contractual deferred compensation allowance meets the legally obligatory allowance, the question arises as to the conditions under which it can replace or supersede the legally obligatory allowance. Full replacement is only possible if the contractual subsidy is at least equal to the statutory amount. In principle, it is also conceivable to replace the statutory subsidy only in part. What happens if the contractual allowance exceeds the statutory allowance – are the statutory legal consequences not triggered in this respect? While the latter question will rarely be relevant, it is always necessary to ask what is required for an effective imputation or replacement. In order to proceed effectively, a distinction must be made between an advance payment and the act of establishing the legal basis for the contractual grant.
IV. Conclusion
We will be happy to show you proposed solutions and assist you in the final implementation of the mandatory employer contribution in compliance with the law.
We also recommend that you take the legal change as an opportunity to examine your supply systems for further current need for adjustment. This is not only for the benefit of simplifications and modernizations or the standardization of historically grown supply landscapes. Rather, in our practice we experience current corporate strategies, transactions and reorganizations, and above all economic challenges as drivers for modifications to the occupational pension system.
We will be happy to provide you with individual and vendor-neutral advice in order to find a solution that is suitable for your company, sustainable, legally compliant and well justifiable in terms of personnel policy.
Please feel free to contact us.
Senior Manager
Head of company pension scheme
Heidestraße 58
10557 Berlin
Tel.: +49 30 530199150
christinehansen@kpmg-law.com
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