Trusteed retirement plans offer companies several benefits, including tax advantages provided by Republic Act 4917. Here are some key reasons why companies choose to establish trusteed retirement plans:
- Tax-Deductible Contributions: Employer contributions to the trusteed retirement fund are considered tax-deductible business expenses.
- Tax Exemptions for Retirement Benefits: Depending on the features of the company’s retirement plan, the retirement benefits received by employees who reach age 50 with at least 10 years of service or those who are involuntarily separated due to death, disability, retrenchment, or redundancy may be exempt from taxes.
- Tax Exemptions for Investment Earnings: The investment earnings generated by a retirement fund are exempt from taxes.
To meet the requirements for tax qualification of a retirement plan, the Bureau of Internal Revenue (BIR) mandates that a retirement fund be administered through a Trust. A Trust Agreement between the Trustor (the company establishing the retirement plan) and the Trustee is one of the essential documents submitted to the BIR.
Now, let’s clarify the roles involved in a trust:
- Trustor: The trustor refers to the person or legal entity that establishes a trust. In this context, the company setting up the retirement plan acts as the trustor.
- Trustee: The trustee is the individual or legal entity who holds and manages the trust property for the benefit of another person or legal entity. They are entrusted with the responsibility of overseeing the retirement plan. In this case, the financial institution with a trust license granted by the Banko Sentral ng Pilipinas or a group of individuals appointed as the Retirement Plan’s Board of Trustees can serve as the trustee.
- Beneficiary: The beneficiary is the person or legal entity for whom the trust has been created. In the context of a trusteed retirement plan, the employees who will receive future retirement benefits are the beneficiaries.
There are two common approaches to appointing a trustee for a trusteed retirement plan:
- Financial Institution Trustee: Companies can appoint financial institutions with trust licenses granted by the Banko Sentral ng Pilipinas as trustees. The trustor and trustee establish an investment policy, and the financial institution exercises sole discretion in making investments according to the agreed policy. Additionally, the financial institution will handle benefit payouts to retiring employees and withhold any applicable taxes.
- Board of Trustees: Alternatively, companies can appoint a group of individuals to serve on the Retirement Plan’s Board of Trustees. These individuals may or may not be associated with the company. This approach provides greater flexibility for companies to create their own investments. Usually, a third-party plan administrator is hired to handle benefit computations and necessary paperwork involved in administering the retirement plan.
Before appointing a trustee for the company’s retirement plan, it is crucial to have the retirement plan rules and regulations and the actuarial valuation for funding purposes. These documents are required by the trustee financial institution and for filing the retirement plan with the BIR. If your company is planning to set up a trusteed retirement plan, please email us a proposal request at firstname.lastname@example.org.