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Law 30/1995 on the Organisation and Supervision of Private Insurance requires that pension commitments assumed by companies towards their employees must be implemented through Pension Plans, Social Welfare Mutual Societies and/or Group Life Insurance Contracts.
Pension commitments are those arising from the employer's legal or contractual obligations towards the staff of the company, as set out in a collective bargaining agreement or equivalent provision, whose purpose is to make contributions or grant benefits linked to the following contingencies:
· Retirement: This may be standard retirement, early retirement, an equivalent situation, or retirement without a public pension.
· Disability: This may be total permanent disability, absolute permanent disability, or severe disability.
· Death of the Participant or Beneficiary: Widowhood, orphanhood, and benefits in favour of heirs.
Pension plans define the right to receive income or capital for the persons in whose favour they are established, in cases of retirement, survival, widowhood, orphanhood or disability, and likewise set out the contribution obligations to those plans.
DEADLINES:
The deadline for externalising these pension commitments is 16 November 2002. This requires companies to transfer, before that date, any funds already set aside and the future financing of commitments to the instruments provided for under the applicable legislation, with internal schemes being prohibited from that point onwards.
Should the company fail to externalise its pension commitments by that date, it would be committing a very serious labour law infringement.
PENALTIES:
In accordance with the Law on Infringements and Penalties in the Social Order, very serious infringements shall be subject to fines as follows:
· At the minimum level, from 500,001 to 2,000,000 pesetas.
· At the intermediate level, from 2,000,001 to 8,000,000 pesetas.
· At the maximum level, from 8,000,001 to 15,000,000 pesetas.
OBLIGATION TO EXTERNALISE:
Companies' obligations to externalise pension commitments may be set out in sector-wide or company-level collective bargaining agreements, in inter-company agreements, in non-statutory agreements, or in individual employees' employment contracts.
The main collective bargaining agreements that include this liability are, among others:
· Abrasive products manufacturing.
· Travel agencies.
· Food wholesalers.
· Construction.
· Leather tanning industry.
· Private education.
· Hospitality.
· Timber industry.
· Graphic arts trade.
· Advertising.
· Steel and metalworking industry.
· Private banking.
· Barcelona pharmacies.
· Department stores.
· Photographic laboratories in Catalonia.
HOW TO IMPLEMENT PENSION COMMITMENTS:
The company selects the instruments through which pension commitments are externalised. These may be implemented by means of group life insurance contracts and/or through the establishment of a pension plan.
PENSION PLANS:
The pension plans that companies must establish in order to externalise pension commitments fall under the employment scheme category. These are pension plans promoted by companies or institutions for the benefit of their employees. There are two types of plan:
1.- Employment plans promoted by companies within the same group:
These are pension plans in which the pension commitments assumed by companies belonging to the same group are consolidated into a single pension plan.
2.- Employment plans promoted by two or more companies with fewer than two hundred and fifty employees (SMEs):
At the outset, these must be promoted by at least two companies, with any other company with fewer than 250 employees able to join in the future.
Tax treatment of pension plan contributions:
Contributions to the Pension Plan:
For the company, contributions constitute a deductible expense, attributed to the participating employee as employment income.
For the plan member, contributions allocated by the company/Institution and those made directly by the member reduce the taxable base for Personal Income Tax (IRPF), up to the lower of 20% of their net employment income or 1,100,000 Pesetas.
Pension Plan Benefits:
For the beneficiary: Benefits are included in the Personal Income Tax (IRPF) taxable base as employment income.
Contributions made by the company/Institution to a Pension Plan do not increase its Social Security contributions, are not subject to withholding on account, and do not increase the withholding rate applied to the employee's other remuneration.
LIFE INSURANCE:
Life insurance is a policy under which the insurer undertakes, in exchange for the payment of a premium and upon the occurrence of the insured event, to compensate the insured for any resulting loss within the agreed limits, or to pay an agreed lump sum, annuity, or other benefit.
The insurer: is the legal entity obliged to pay the policyholder an indemnity, lump sum, annuity, or other agreed benefit upon the occurrence of an insured event, in exchange for a premium.
The policyholder: is the natural or legal person who enters into the contract with the insurer and assumes the rights and obligations arising from it, or who designates a third party (the beneficiary) to receive a specified sum in the event of death or survival to a fixed date.
Types of life insurance:
· Survival annuity insurance: the insurer undertakes to pay a temporary or lifetime annuity if the insured survives to a previously specified date. If the annuitant dies, the annuity may pass to another person if this is expressly provided for in the policy. If the specified date is not reached, no payment of any kind will be made by the insurer.
· Deferred capital insurance: this is similar to the above, with the key difference that these policies do not guarantee a capital sum for the insured's heirs. If the insured dies before the date stipulated in the contract, the insurer is released from its payment obligation. This type of policy guarantees payment of a lump sum rather than an annuity. In this second category fall policies that cover the death of the policyholder from any cause (except suicide).
Tax treatment of life insurance and unit-linked policies:
The tax benefits of a life insurance policy come into effect when the benefit is received, which is treated as income from movable capital. The income received is subject to deductions that depend on how the policy is paid out, the length of time the premiums have been paid, and the age of the beneficiary. The maximum deduction can reach 85% of the total income. Once that reduction has been applied, the resulting amount is subject to Personal Income Tax (IRPF) at the taxpayer's applicable rate, with a withholding rate of 18%. The life insurance category includes 'unit-linked' policies, which are insurance products tied to investment funds. If the policyholder chooses to receive their life insurance or unit-linked benefit as a lump sum, the difference between the final benefit paid out and the premiums contributed (i.e., the return on investment) is reduced for Personal Income Tax (IRPF) purposes according to how long the premiums have been in place: 30% for returns generated by premiums paid for more than two years; 65% for returns generated by premiums paid for more than five years; and 75% for returns generated by premiums paid for more than eight years.
Please do not hesitate to contact our office if you have any questions regarding this matter.
