How To: 3 Basic Things About Retirement Plans

In the world of retirement plans, there is often some level of uncertainty as to the basic facts on retirement plans that every Company should know about; such facts, however, may all too easily be obscured by other, more routine aspects of a Company’s operations.

To provide an additional level of clarity about retirement plans, there are a few basic fundamentals that should be emphasized. In particular:

1. What is a retirement plan?
2. What are the differences between a formal and informal retirement plan?
3. Why would a company set up a formal retirement plan for its employees?

Question #1 may seem overly simplistic; however, focusing on the basics can be useful, given that succeeding discussions will build on such basics. Thus, to start – a retirement plan is an agreement between the Company and its employee in which the Company promises to provide a benefit at the time of the employee’s retirement in exchange for services rendered to the Company.

Such an agreement may be formal or informal, which leads to Question #2. An informal plan can range from being an internal policy covering only selected employees, to a verbal agreement between the Company and an employee, or a past practice of providing benefits at retirement that has effectively established a precedent that employees expect will continue to apply to them as well.

While having an informal plan is permissible, it is easily seen that a whole range of pitfalls could conceivably arise from the very informality of such agreements, from the Company discriminating in favor of selected employees, to the possibility of the Company reneging on an unwritten promise, or a change in management no longer recognizing the prior precedent of providing benefits.

A formal retirement plan, as defined by Philippine law through the Bureau of Internal Revenue (BIR), covers and effectively eliminates all of the above pitfalls. That is, BIR Regulations require, among other features, that a formal retirement plan be:

1. a written agreement;
2. non-discriminatory – meaning, the benefits provided are regardless of an employee’s position; and
3. treated as a going concern, rather than a temporary or limited provision.

Now, while a formal retirement plan may, on the surface, seem more daunting and onerous versus an informal one, Companies are encouraged to look closer and consider the very real advantages in setting up a formal retirement plan – hence Question #3. And, the answer to this is simple: To enjoy the tax exemptions granted by the BIR.

That is, if a Company sets up a formal retirement plan and duly registers it with the BIR, it becomes a tax-qualified plan under Republic Act No. 4917.

Next Article: Retirement Plans and Tax Exemption

Raymund Benedict, or RB, is the Chief Operating Officer of EM Zalamea Actuarial Services since 2008.

Prior to that, RB pursued further studies in Retirement Planning and Employee Benefits at New York University (NYU), under the School of Continuing and Professional Studies. His studies were concurrent with a post as an analyst with one of the premier consulting firms headquartered in New York City.

His previous work experience, spanning more than 10 years, was with several of the top multinational companies. He also received his MBA from Hult International Business School in Boston, Massachusetts.