FAQs

Frequently Asked Questions:

 

What are the advantages and disadvantages of a multi-employer account, - in our case, including, as in our case, 4 companies? of having the effective date of valuation 01 august 2014, instead of 01 january 2014?

The advantage of setting up aA multi-employer plan is that it will allows the transfer of employees from one company to another without a break in their tenure. Therefore, when an employee retires, the plan  from a company, it considers the years of service rendered in the previous company. In a single single-employer plan, when an employee transfers from company A to company B, he starts from day 1 and is not will be unable to carry-over his years of service in from company A to company B.

 

The only limitation presented by in a multi-employer plan is that the benefits for all participating companies participating in the plan should must be the same. In case one of the companies wishes to upgrade its benefits, but the the  other companies  cannot afford it, then a solution will be for that the former must company to  separate from the multi-employer plan and, instead,  have establish its own single single-employer plan.

What are the advantages and disadvantages of using August 1, 2016 as an effective date of valuation instead of January 1, 2016?

Regarding the valuation date, we recommend that it be theThe  1st first day of your the balance sheet date, in this case, January 1, 20142016, is generally recommended as the effective date of valuation  so that you can avail of the tax deductibility deduction applied for the full year. If the valuation date were to be was changed to August 1, 20142016, then you would you will only be able to deduct current service contributions for August to December, or only 5 months.

If there were  no significant changes to in your employee group are expected between January and August, you may want to  consider applying the January 1, 2014 valuation date instead.

What is the downside of having a single single-employer plan? If we transfer the employee from one company to anotheran affiliated company, can't we just tell the fund manager that the start date of the employee on in the new company will be is his hiring date from the previous company?

If the total number of employees is relatively large, omissions of 1 or 2 employees will not materially affect the computations. However, if the total number of employees is small, the omission of 1 or 2 employees, especially if they have large salaries and long tenures with the company, will affect computations. In this case, clients can either perform a recomputation or consider these emissions in the next valuation.

 

What will be the procedure: How do we in enrollling / adding  new employees to the plan? Like for instance, we have now already hired 5 new employees from June -– August 20142016, but the data I gave you only included the employee count up to May 2014.

In general, employees hired after the valuation date will be excluded from the valuation. However, the valuation includes a recommended funding rate calculated as a ratio between the current service contribution and the payroll. Thus, if you hire new employees after the valuation date, you can apply the funding rate against the monthly, quarterly, or annual payroll to ensure that new employees are accounted for in the contributions.

Do we have to accredit our retirement plan to with the BIR? What are the pros and cons of doing so?

There are four main benefits of setting up a formal retirement plan:

  • Contributions to the retirement trust fund are a tax-deductible expense
  • The earnings of the retirement fund are tax exempt
  • Retirement benefits received by the employee are tax-exempt provided the employee is at least 50 years old and with at least 10 years of service (RA 4917)
  • Systematic build up of funds to meet future obligations

All of these benefits can only be availed if the retirement plan is tax-qualified by the BIR.

What are the advantages and disadvantages of having employees voluntarily contribute to their retirement plans the plan contributory on the part of the employees? If employees will contribute to the plan thru salary deduction, then, they  will they earn more in terms of interest / gains? Could we include that on the plan rules - like on top of the basic or what is provided by law, which is 22.5 days for every year of service, we will also give to the employees the equivalent interest / gains since this is a trust fund? And if they resigned, they get their employee share with interest / gains but they will have to stay for a minimum of 3 years, otherwise, they will only be reimbursed of their actual contribution? Have you experienced having this kind of plan rules from your other clients?

Your trustee is bound by the retirement plan rules and regulations, therefore will not release funds over and beyond what is stipulated in the rules. If it is a single employer plan, then the trustee will not pay for the services rendered from the previous company. That's why if you foresee transfer of employees among the affiliate companies, then it is recommended to set up a multi-employer plan.

 

Employees hired after the valuation date will be excluded from the valuation. However, the valuation will have a recommended funding rate which is a ration between the current service contribution and the payroll. So if you have new employees hired after the valuation date, you can apply the funding rate against the monthly, quarterly or annual payroll to ensure that new employees are accounted for in the contributions.

 

That is why it is recommended to do an update Funding Valuation every 2 to 3 years to capture the movement in the employee profile and so your contribution continue to be up-to-date.

 

There are 4 main benefits in setting up a formal retirement plan:

 

Contributions to the retirement trust fund is a tax deductible expense

 

Earnings of the retirement fund is tax exempt

 

Retirement benefits received by the employee is tax exempt provided he is at least 50 years old with at least 10 years of service (RA 4917)

Systematic build up of funds to meet future obligations under (RA 7641)

 

All benefits mentioned above can only be availed if the retirement plan is tax qualified by the BIR. No BIR tax approval letter means no tax benefits.

Yes, you may choose to allow voluntary contributions in behalf of the employees. The, and employers may consider matching the employees' contributions to entice employees others to join the program. In this case, the  employees earn from the earnings of the retirement fund, plus and receive the employer employer-matching contributions, if any.

 

Provisions in the rules will be must be set to determine when the an employee will can receive the employer-matched contributions share, it will not be: they are not automatically paid upon resignation. In case there won't be any matching in behalf of the employer opts not to match extra contributions, then the employees will receive his only their contributions plus earnings.

 

In our experience, employees generally agree to contribute more to the fund only participate if there is their employers counterpart match these extra contributions. however, this will be an added expense to the employer.


In the event that you choose to have this voluntary contribution, you may want to consider giving your employees online access to view the accumulated values so they appreciate this benefit.

Article IV, Section 3 of the Rules and Regulations “Valuation” states that “The contributions to the Fund shall be actuarially determined at least once every two or three years.” .” Is this a BIR requirement? ? If not, what are the BIR requirements?

Here are some highlights on theThe following comparison highlights differences between the Amended PAS 19R and the ASC 715 (US GAAP) reporting of employee benefits:


  • Computation methodology - both Both standards use the same projected unit cost method (PUCM)  in determining the present valuation of the defined benefit obligation
  • Treatment of overfunded overfunding - Iin US GAAP, there is no ceiling on the surplus to be recognized has no ceiling; while in PAS 19R, there is an asset ceiling, which requires additional computations, is recognized
  • Actuarial gains/losses (AGL) - iIn US GAAP, the AGL is accumulated in other comprehensive income (OCI) but subsequently amortized through profit & and loss (with "recycling"). In; in  PAS 19R, the AGL is immediately recognized in OCI without recycling
  • Overfunded Overfunding or underfunded underfunding -– same treatment forBoth reports treat overfunding/underfunding in the same way US GAAP and PAS 19R: balance sheet = deficit --. I if the plan is underfunded then , the entire unfunded amount is recognized in the balance sheet. If the plan is overfunded, in US GAAP, the balance sheet reflects the entire surplus (no adjustment);  while in PAS 19R, the balance sheet is reflects the adjusted surplus due to the asset ceiling
  • AGL in OCI - In US GAAP is the accumulated OCI then reclassified to P&L. In PAS 19R, the AGL can be accumulated in OCI or transferred within equity (reclassification to P&L is prohibited)
  • Reports - PAS 19R requirements requires more narrative and quantitative disclosures which,  include including sensitivities, responsibilities of trustees, etc.; US GAAP does not.

To sum it up, the liability comes out to be the sameIn summary, the liabilities for both PAS 19R and US GAAP are about the same. As for the, although OCI and expense, its  may varies vary between the 2 two reports because of the different differences in treatment and guidelines. 

Why does the number of employees differ from the actual data submitted?

Some employees are hired after the valuation or cut-off date. Hence, they are not counted in the study as of the valuation date.

What if new employees are hired in the coming year? How are they treated in the calculations?

Because new hirees have not rendered past service to the hiring company, their employment will not affect Past Service Liability (PSL) computations. For Annual Normal Cost (ANC) contributions, we recommend that the funding rate (ANC as a percentage of the ACP) be used instead of the absolute amount so that increases in salary, employee turnover, and new hirees can be accounted for.

What if, after receiving the final actuarial valuation report, we find out that we had accidentally omitted 1 or 2 employees; will the computations be materially affected?

If the total number of employees is relatively large, omissions of 1 or 2 employees will not materially affect the computations. However, if the total number of employees is small, the omission of 1 or 2 employees, especially if they have large salaries and long tenures with the company, will affect computations. In this case, clients can either perform a recomputation or consider these emissions in the next valuation.

What is Annual Normal Cost (ANC)?

The ANC is the contribution required of a company for the service to be rendered by the employees for the current year.

What is Past Service Liability (PSL)?
The PSL is the liability of the company for services rendered by their employees from hire date to valuation date.

The PSL can be paid in full or in amortized amounts over a 3-year, 5-year, or other schedule so long as this period does not exceed the remaining working life of the employee group (see Schedule I-A).
Over a 10-year amortization period, we divided the PSL or the unfunded PSL by 10, but our result is different from that detailed in your report. Why is this so? 

While companies with less than 10 employees are exempt from putting up a retirement plan, we still recommend that these companies register retirement plans with the BIR in consideration of that fact that they may hire more employees in the future. Companies with 10 and more employees must register retirement plans with the BIR.

What are that tax implications of contributions to the retirement trust fund?
One hundred percent of the ANC contribution may be considered a deductible expense for the year. Only 10% of the PSL contribution may be considered a deductible expense for the same year.
Can we implement a retirement plan that offers benefits less than those provided for in the minimum retirement pay law or R.A. 7641?
Yes you can, and this plan will still be approved by the BIR. However, upon retirement of an employee, the company will still be required to pay the minimum regulatory benefit as set forth in R.A. 7641. As amounts taken from the retirement trust fund are based only on the BIR-approved retirement plan, differences between the approved plan and minimum retirement benefit must be shouldered by the company.
How is the retirement benefit defined per R.A. 7641 or by law?
“One-half month salary for every year of credited service”. One-half month shall mean 15 days vacation leave plus 5 days special/sick leave plus 1/12 of the 13 month or a total of approximately 22.5 days pay per year of credited service.
Why do we have to submit a retirement plan to the BIR?
Companies register retirement plans with the BIR to enjoy tax qualifications. Specifically, retirement benefits are exempt from tax, earnings of the retirement trust fund are also tax-exempt, and company contributions to the retirement trust fund can be treated as a deductible expense.
We would like to amend our retirement plan. Can we reduce the benefits that were previously approved by the BIR?
Any reduction in benefits may create problems with the BIR when applying for amendatory tax qualification. We consistently recommend amendments to the retirement plan that add to and not reduce the benefits previously approved by the BIR. 
In Schedule I-A of the valuation report we received, why does the annual amortization have 4 presentations (3-, 5-, 10-, and other-year amortization periods)?
Clients are provided with several payment presentations so that they can best decide how long to amortize the PSL or the unfunded PSL.
We only have 5 employees. Are we exempt from setting up a retirement plan?
While companies with less than 10 employees are exempt from putting up a retirement plan, we still recommend that these companies register retirement plans with the BIR in consideration of that fact that they may hire more employees in the future. Companies with 10 and more employees must register retirement plans with the BIR.