The impact of short-time work on occupational pension schemes

The Corona crisis is preoccupying almost all companies. Maneuvering through the crisis is an enormous challenge. The labor law measures taken and their effects are not commonplace for both employers and employees. With regard to company pension plans, questions arise about the accounting and financial consequences for pension obligations, which we reported on in our last Client Alert. Furthermore, the consequences of short-time work on employer- and employee-financed pension commitments are being discussed, in some cases controversially; in particular, the handling of deferred compensation agreements raises questions. How to proceed here? In this Client Alert, we give you an overview of the key aspects of the current discussion.

1. effects on employer-financed pension commitments
The introduction of short-time working also has an impact on the company pension scheme. Depending on the structure of the pension commitment, the following question arises

– in the case of defined contribution plans, according to the amount of contributions to be paid or credited during this period, or
– in the case of defined benefit plans, according to the amount of pension entitlements earned during this period.

In the case of employer-funded pension commitments, the introduction of short-time working – depending on the specific form of the commitment – affects in particular the level of employer contributions and, in turn, the level of pension benefits.
From the point of view of company pension law, short-time work is generally to be regarded as part-time work or, in the case of zero short-time work, as a dormant employment relationship. As a result, only reduced or, in the case of zero short-time working, no employer contributions are due during this period, or the pension entitlements to be earned are reduced in line with the remaining degree of part-time working. For the exact calculation of the relevant amounts, the provisions of the specific pension regulations and also the relevant case law of the Federal Labor Court on occupational pension schemes for part-time employees must be observed.
Irrespective of the legal situation, the question arises as to whether the employer wants to support the employees here so that the occupational pension scheme remains undiminished regardless of the short-time working, which already means an economic restriction for the employees per se.
Some companies have concluded agreements with the works council under which the occupational pension is not reduced by short-time working, at least for a certain period. Rather, pension contributions and benefits will continue to be granted to the extent that they would have resulted from the level of employment prior to Corona.

2. effects on employee-financed pension commitments
In the case of deferred compensation, future salary entitlements must be converted into an entitlement to company pension benefits of equal value (Section 1 (2) no. 3 BetrAVG). However, short-time allowance (“KuG”) is a tax-free wage replacement benefit (just like unemployment or sickness benefits, for example). Claims for compensation against government agencies are generally not convertible. Therefore, deferred compensation from KuG cannot be made. As a result, the employee basically only has the reduced income that continues to be paid available for the continuation of his deferred compensation.
Many companies pay a voluntary contribution to the KuG. Can the employee use this voluntary allowance to continue his deferred compensation? This is discussed quite contradictory.
In this discussion, a distinction must be made between a subsidy that tops up the KuG to 80% of the previous actual remuneration and the portion of the subsidy that exceeds the aforementioned 80% limit. Due to the Act on the Implementation of Tax Relief Measures in Response to the Corona Crisis (“Corona Tax Relief Act”), the voluntary KuG subsidy of up to 80% (“KuG subsidy up to 80%”) remains tax and social security contribution free for the employee.
Only an additional contribution by the employer to the KuG (“increased KuG contribution”) constitutes taxable income for the employer and is subject to contributions. This portion of the increased KuG allowance, which is subject to tax and social security contributions, constitutes “normally includable” earned income and can be used to continue a deferred compensation plan.
However, opinions are divided on whether a KuG allowance of up to 80%, which is tax- and social security-free for the employee, can be used for deferred compensation with regard to social, tax and labor law aspects.
It is sometimes considered that any remuneration paid on the basis of the employment relationship is sufficient for deferred compensation.
Thus, it is argued that this allowance is also remuneration for work. The fact that this classification is based on the provision in § 1 para. 1 No. 8 Social Security Remuneration Ordinance (“SvEV”) does not apply in social law terms does not change the nature of the remuneration as such. Rather, the social insurance law norm is to be understood to mean that it is fundamentally still a matter of remuneration, which is only exempt from the social insurance obligation within the framework set by § 1 SvEV.
In addition, the voluntary benefits of the KuG allowance are comparable to other (convertible) capital-forming benefits that are also paid on the basis of the respective employment relationship but are not directly linked to the work performance.
In our opinion, however, the assumption of a lack of recoverability of the KuG subsidy up to 80% is more convincing. The purpose of the tax and social security benefits of the subsidy under the Corona Tax Assistance Act is to increase the net income of employees in order to cushion the economic consequences of short-time work. According to Section 1 No. 8 of the Social Insurance Contribution Ordinance (SvEV), the supplement to the KuG is therefore not remuneration and consequently not covered by a legal entitlement to deferred compensation.
Accordingly, there is a lack of convertible gross pay, especially in the case of reduced working hours to zero. Exceptions to this may only apply if any subsequent compensation aspects (bonus or similar) are still to be taken into account in the corresponding month of short-time working.
Irrespective of whether the part of the KuG allowance discussed here is formally open to deferred compensation or not, the question arises as to whether it makes sense to convert this allowance. Finally, the employee does not pay any taxes or social security contributions on this amount, so that by its very nature, deferred compensation does not result in any savings in this respect. Nevertheless, the subsequent pension benefits are taxable and at least partially subject to contributions. For this reason, there is also no mandatory employer contribution pursuant to § 1a para. 1a BetrAVG.

3. recommendation for action and conclusion
Even in times of the Corona crisis, companies have to make various risk assessments for the implementation of company pension plans for their employees. In particular, ad hoc applies here with regard to short-time work:

– The pension commitments must be analyzed to determine how periods of short-time working are to be treated with regard to employer-funded benefits.
– Based on this analysis, it is recommended that an agreement on short-time working should include a provision (which may also be clarified) on how to deal with existing pension commitments.
– Depending on the economic viability for the company, a new distribution of pension contributions between employees and the employer could be introduced for a limited period during the period of short-time working.
– Conversion of remuneration should only be serviced from the remaining reduced remuneration and, if applicable, an employer’s allowance in excess of 80%. Conversion of remuneration agreements must be adjusted accordingly and, if relevant, the external pension provider must be informed accordingly.

What are your questions and experiences about this? Please feel free to contact us. As always, we look forward to exchanging ideas with you.

If you have any further questions or require further information, please do not hesitate to contact the experts at KPMG AG Wirtschaftsprüfungsgesellschaft. Susanne Jungblut (Director, Deal Advisory Pensions, Tel. +49 89 9282-1066, Mobile M +49 174 323 1972, E-Mail sjungblut@kpmg.com) and Detlef Mann (Tax Advisor, Tax Services Tel. +49 69 9587-1143, Mobile M +49 173 576 4646, E-Mail detlefmann@kpmg.com) are at your disposal.

The information contained is of a general nature and does not address the specific situation of any individual or legal entity. Although we endeavor to provide reliable and up-to-date information, we cannot guarantee that such information is as accurate as it was when it was received or that it will continue to be so in the future. No one should act on this information without appropriate professional advice and a thorough analysis of the situation in question. We provide our services subject to professional law review of admissibility in each individual case.