Tax Benefits of a Retirement Plan

Retirement is inevitable. It is that special time for an employee to reap the rewards of years-long hard work and sacrifice. When carefully planned, a retirement plan is the key to financial security, building up a portion of one’s hard-earned money to be set aside for one’s senior years. 

As for companies, the Retirement Pay Law (Republic Act (RA) 7641) does not really mandate companies to set up formal retirement plans. Hence, this begs the question:  Why then should they consider doing so? 

The answer is straightforward: It is to allow both the employer and the employee to take advantage of the tax benefits available only when a retirement plan is formally filed with the Bureau of Internal Revenue (BIR). Below are  some of the tax benefits of a tax-qualified retirement plan:

• Retirement benefits paid to qualified employees are tax-exempt, subject to certain conditions;

• Contributions to the retirement fund are a tax-deductible expense for the company;

• The earnings of the retirement trust fund are tax-free; and

• Systematic build-up of future obligations under RA 7641.

It is important to note that even if the retirement benefits provided to its retired employees occurred during the covered period , the retirement benefits provided to them are still liable to income tax (if the company does not have a BIR-registered retirement plan). Moreover, benefits received by an employee who voluntarily resigns from the company is always taxable, regardless of his age or years of service at the time of voluntary separation.

A retirement plan that is duly registered with the BIR will receive a Certificate of Qualification as a Reasonable Employees’ Retirement Benefit Plan. It is granted by the BIR when the conditions and requirements have been met from the drafted retirement plan rules up to the certificate of initial funding with the company’s chosen Trustee – with the direct result of the retirement trust fund becoming a legally separate entity from the Company. Setting up a retirement plan for your company may seem overwhelming to self-manage but not if you have the right partner to work with it. We are here to help you to provide an end-to-end actuarial service from drafting retirement plan rules to the actual BIR Filing. To learn more or to request for a quote you may contact our Marketing team at proposals@zalamea.ph