Abolish the 80% rule to encourage participation in these supplementary pension schemes
Despite the government’s efforts to encourage retirement savings through supplementary pensions schemes, a 2019 study by SIGEDIS revealed that 36% of employees still do not have a supplementary pension (also known as the second pillar system). In light of these results, the current second pillar system is a much-debated subject often criticized for its lack of attractiveness.
To solve this issue, the government incentivizes participation in these supplementary pensions schemes by offering fiscal advantages, among which the 80% fiscal rule. According to this rule, if the total of the legal pension and the supplementary pension does not exceed 80% of the employee’s annual gross remuneration, the employer can fully deduct pension contributions. A very cumbersome system that gives rise to complex calculations and tax audits that regularly end up in court.
In 2020, the Cour de Comptes or Rekenhof (Court of Audit) analyzed the effectiveness of tax incentives to constitute a supplementary pension. The Court of Audit underlined the complexity of the 80% rule limiting the deductibility of paid contributions and recommended the adoption of a simple and comprehensive calculation system that would further encourage the implementation of supplementary pension plans.
Consequently, in September 2020, the Belgian government’s coalition agreement included a mandate to prepare a tax reform to modernize and simplify the tax system,. During the summer 2022, a vision memo was published regarding a tax reform by Finance Minister Van Peteghem which has been the subject of several discussions including a study paper drafted by Professor Delanote of Ghent University.
“Everyone should be able to supplement the statutory pension with a tax-advantageous supplementary pensionl.”
Minister van Peteghem | Minister
In March 2023, Minister van Peteghem presented the 1st phase of the tax reform project which has a direct impact on supplementary pensions in the second pillar system. Minister van Peteghem indicated in his project that the goal of the reform is to: “offer the possibility of supplementing the legal pension with a transparent and tax-efficient supplementary pension. Everyone should be able to supplement the statutory pension with a tax-advantageous supplementary pension.”
Therefore, the tax reform proposes to replace the 80% rule by a maximum contribution depending on the normal annual gross remuneration (NAGR). The maximum contribution was determined based on the "Circulaire Massard" of 4 February 1987 and is equal to:
Provided that the tax reform project is approved, as of 2037, the above formula will also be limited to 25% on the total normal gross annual remuneration in total.
In current practice, when the 80% rule is not respected and contributions exceed the 80% limit, employer's contributions are non-tax deductible for the employer and employees’ contributions can potentially loose the tax reduction. Consequently, the employee will not bear the weight of taxation on the employer's contributions and, in practice, this led to deliberately exceeding the limits.
To discourage the constitution of supplementary pension plans outside these limits, if the tax reform project is to be adopted, contributions paid in excess of the fixed limit will henceforth be fully taxable for the employee as a benefit in kind and deductible as remuneration by the employer. Hence, the main impact on the taxation switches from the employer to the employee, which should discourage employers from deliberately exceeding the limits.
Some critics have underlined that this could lead to a risk of double taxation since contributions would both be taxed when exceeding the limit and when the capital is paid at the time of retirement. To solve this risk of double taxation, the reform project foresees the reduction of supplementary pension benefits with the amounts of the benefit in kind already taxed. Nonetheless, this would place the burden of proof on members that would be forced to recover pension documents covering all their careers to obtain this tax reduction.
Under the current system, there is a possibility for the employer to transfer the unused margin of a certain tax period into a subsequent time period: the “backpack” effect. The tax reform project would limit this “backpack” effect to a 10-year limitation within the company.
Another addition of the tax reform project is the inclusion of some transitional measures on the above formula up until 2043 for Defined Benefit plans, the maximum contribution will decrease over time:
At the moment, the reform carries a lot of uncertainty on the exact components of the calculation of that contribution (ie. collective funded Defined Benefit plans don’t have individual contributions) but also about the combination of Defined Benefit plans and Defined Contributions plans.
Intercabinet discussions were initiated in March 2023 with a target to obtain a government agreement on the 1st phase of the tax reform and approval by the Parliament by summer 2023. The tax reform is expected to enter into force in January 2024.
Nonetheless, the tax reform project is currently facing a lot of criticisms and opposition. Social partners (employer organizations and trade unions) have concluded an interprofessional agreement (AIP or IPA) on 14 March 2023 asking for a tax status quo until 1 January 2028. On 16 March 2023, social partners working on the harmonization of second pillar pension system have requested that the government puts the tax reform on hold until 2030.
It is still difficult to predict whether the tax reform project is final and whether the government will be able to obtain Parliament’s approval by summer 2023 or put the tax reform on hold until 2030.
