In 2018, Germany introduced the new Law to Strengthen Occupational Pensions - known as ‘Betriebsrentenstärkungsgesetz’. The law is intended to address decreasing participation in state pensions by lower-income workers and, amongst the range of reforms it brings, are changes to the way employers support their employees’ pension contributions - in particular, those contributions made as part of a salary sacrifice scheme.
In more detail, with effect from 1 January 2019, employers in Germany will have to pay an obligatory 15% supplement to employees’ pension scheme contributions (pre-tax) made via salary sacrifice arrangement. Importantly, this supplementary payment is only imposed if the employer stands to save money from the reduced costs of their statutory social security contributions.
Salary sacrifice arrangements in place prior to 1 January 2019 will continue until 1 January 2022, after which the obligation will apply.
Advantages & Disadvantages
Complicating employers’ obligation to pay the 15% subsidy is the issue of whether they will save money from the resulting reduced cost of their statutory social security contributions.
The act of monitoring and calculating social security contributions (to determine if supplements should be paid) involves significant administrative effort - so much so that it may make more sense, and be more cost-efficient, for SMEs to simply pass on a 15% lump-sum contribution to their employees, rather than working out the small details of the potential savings.
The business advantages of simply paying a lump-sum are obvious: employers don’t have to get bogged down during complicated administrative processes like payroll, can implement the supplement quickly and easily, and ensure that all employees receive the same treatment.
The problem with the lump sum approach, however, is that it doesn’t save money in every context since it is dependent on employees’ gross income, which is itself subject to social security contributions. While it makes sense for employers to pay a lump sum into the pension scheme for employees receiving wages below the social security ceiling, for employers earning above that amount, the potential benefit (saving) for employers needs to be calculated individually.
Calculating your Supplement
To help you calculate the effect of the subsidy on your business, consider the following examples:
- An employee contributes 100 Euros of their gross income (2,500 Euros) in a salary sacrifice arrangement, to a direct insurance pension scheme.
- Thanks to the reduced gross income (now around 2,400 Euros), the employer makes monthly personnel cost savings of 19.38 Euros - the 19.38% social security contribution saved on the 100 Euro salary sacrifice.
- By paying a 15% supplement, the employer makes a net saving of 4.38 Euros.
- An employee contributes, via salary sacrifice, to their pension scheme from an 8000 Euro gross monthly income – an income amount above the social security ceiling.
- As a result of increased employer social security contributions, the employer does not save money by paying the same 15% supplement.
- An employee contributes 100 Euros to their pension, via salary sacrifice, on an income of 5,000 Euros a month - an amount between the 2018 ceilings for health insurance (4,425 Euros), and pension and unemployment insurance (6,500 Euros).
- In this case, the employer stands to save 10.38 Euros on their pension and unemployment insurance contributions, but will not make a saving on health insurance, since the employees’ gross income exceeds that ceiling.
- The 15 Euro contribution supplement would subsequently incur an additional cost of 4.20 Euros for the employer.
Germany’s pension reforms are ongoing, so businesses should ensure they remain on top of any changes in legislation and make the relevant changes to their administrative infrastructure. While the supplement regulation does not come into effect until 1 January 2019, its impact should not be underestimated: admin-heavy internal processes like payroll, which will be vital to the new compliance environment, so employees should be made ready ahead of time.
For more information about Germany’s tax and social security landscape, browse activpayroll’s Global Insight Guide to Germany.