It is advised that companies establish retirement plans and have them registered with the BIR in order to receive the following advantages, even if the Retirement Pay Law (RA) 7641 does not mandate businesses to have a formal retirement plan.
Tax Advantages for a BIR-Filed Retirement Plan
Retirement plans that are filed and have subsequently received a tax qualification letter from the BIR are accorded with tax privileges. A retiring employee who is at least 50 years old and has completed at least 10 years of service will receive a tax-exempt benefit.
All earnings on the retirement fund are tax-exempt and can be used to decrease the future contributions of the company to the retirement fund. Additionally, contributions to retirement funds are regarded as tax-deductible expenses subject to the rules provided in Section 34(J) of the 1997 National Internal Revenue Code.
Increased Employee Retention and Employee Engagement
Research shows that the amount of output, participation, and length of stay of employees in a company are affected by their financial worries. Thus, employers use competitive retirement plans both to recruit proficient individuals to join the company and to protect productive employees from withdrawing from it. Competitive retirement plans tend to show employees that their employer values them and cares for them by helping them prepare for their future.
Some companies set up retirement plans where an employee may choose to contribute a certain percentage of his salary as savings that he can acquire whenever he resigns or retires from his employer. Some generous companies even match their employees’ contributions to the retirement fund (Retirement Plans with Employer Matching), up to a certain percentage, to encourage their employees to make contributions to the company’s retirement fund.
Retirement plans help companies prepare for future obligations.
As stated above, setting up a retirement plan is not necessary under RA 7641. However, the said Republic Act still obligates companies to pay retirement benefits for eligible employees, which may result in a company’s inability to cover its liabilities to the retiring employees in instances of lack of sufficient cash flow. Setting up a retirement plan and doing a regular funding valuation is a good way of preparing for the future obligations of the companies to avoid this kind of position.
Consistently having a regular funding valuation of your retirement plan will help the company check if it has a sufficient amount of funds to cover its responsibilities to employees once they retire from the institution. The company will have knowledge of how much it should contribute to the fund to fully handle the retirement benefits of the employees. On the other hand, if the retirement fund has been sufficient to cover the benefits once all eligible employees leave the company, the amount allotted for the retirement fund may be used by the company for its other financial responsibilities instead of contributing it to the retirement plan.
With the following benefits in mind, if you want to set up a retirement plan, update funding valuation, or consider improving your program, feel free to contact us at info@zalamea.ph.
Nevoj Abadilla
Nevoj is a graduate of BS Applied Mathematics from the University of the Philippines Los Baños. He is one of Zalamea’s actuarial analysts with one year of experience in making Valuation Reports, Retirement Plans, and Actuarial studies.