The government’s proposed first phase of its planned comprehensive tax reforms would, among other things, simplify the rules on tax-deductibility of employer contributions to supplemental retirement plans by repealing the so-called 80% rule and replacing it with tax-deductible limits defined in terms of a percentage of pay. The intent of this change is to encourage and ease employer provision of such plans; overall, the government’s broader aim is to incentivize employment by basing taxation less on labor income and more on wealth and consumption.
Under the current 80% rule, the annual tax-deductible limit on an employer’s contributions to a tax-qualified supplemental retirement plan (defined benefit, defined contribution or hybrid) is determined by a complex calculation based on the principle that the sum of a participant’s supplemental pension and social security “legal” pension must not exceed 80% of the participant’s final annual income. An employer contribution above the calculated tax-deductible limit does not result in additional taxable income for participants.
The proposed reform would instead determine the annual tax-deductible limit as 12% of annual earnings up to the social security earnings ceiling (71,520 euros for 2022), plus 32% of annual earnings in excess of the ceiling, if any. From 2037, the sum would be subject to a cap of 25% of annual earnings. For defined benefit plans, there would be a phase-in of this overall cap (50% cap in 2028, 40% in 2031 and 32.5% in 2034).
Any employer contributions above the limit would be considered fully taxable income to employees.
It should be noted that the proposed reforms raise several important implementation questions that will require further guidance (e.g., how the new individual contribution-based limit would be determined in plans having a defined benefit component, and how double taxation of any excess contributions and benefits would be avoided).
See our article: Tax reform and its impact on supplementary pensions for further information.
Ninety percent of employers surveyed by WTW provide supplemental retirement benefits to their employees. These would all be affected by the proposed changes. The details of the first phase of the tax reforms were published in early 2023, including a target implementation date of January 1, 2024, and were debated within the government until mid-June. However, draft legislation has not yet been submitted to parliament, and it is uncertain if the target timing will be met. Doubt has been cast on the government’s resolve to enact the tax reform due to possible disagreements within the governing coalition, opposition from certain social partners and the general elections approaching in June 2024.
