Based on R.A. 7641, the retirement benefit due to employees is equivalent to one-half month salary per year of credited service wherein the term “one-half month” shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves; or a total of approximately 22.5 days pay per year of credited service.
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 the fact that they may hire more employees in the future. Companies with 10 and more employees must register retirement plans with the BIR for tax-exemption.
Regarding the valuation date, we recommend it to be the 1st first day of your balance sheet date. The advantage of this is that you can avail of the tax deductibility applied for the full year. Otherwise, the tax-deductibility of the Annual Normal Cost will be pro-rated. For an instance, if the valuation date is to be changed to August 1, 2016, then you will be able to deduct only the current service contributions for August to December only in case the company follows the calendar year.
There are four main benefits of setting up a formal retirement plan:
- Contributions to the retirement trust fund are tax-deductible.
- 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 registered with the BIR.
The ANC is the recommended yearly contribution for current and future services.
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 of the report).
One hundred percent of the ANC contribution may be considered a deductible expense for the year. On the other hand, only 10% of the PSL contribution may be considered a deductible expense for the same year.
Yes 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.
Because new hires have not rendered past service yet, their employment will not affect the Past Service Liability (PSL). For the Annual Normal Cost (ANC), 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 hires can be accounted for.
The advantage of setting up a multi-employer plan is that it will allow the transfer of employees from one company to another without a break in their tenure. Therefore, when an employee retires, his years of service rendered in the previous company will still be considered. On the other hand, in a single–employer plan, when an employee transfers from company A to company B, he will not be able to carry–over his years of service rendered in his former company.
The only limitation of a multi-employer plan is that the benefits for all participating companies should must be the same. In case one of the companies wishes to upgrade its benefits but the other companies cannot afford it, then a solution will be for the former to separate from the multi-employer plan and, instead establish its own single-employer plan.