Changes to the way German employers contribute to their employees’ pension schemes are due to come into effect at the start of next year.
The new Law to Strengthen Occupational Pensions is intended to address the challenge of fewer lower-income workers paying into state pensions by changing the way employers support their pension contributions. Employers will in future be required to pay a 15% supplement on top of employees’ pension scheme contributions (pre-tax) through a salary sacrifice arrangement.
Importantly though, this supplementary payment will only be 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 new obligation will apply.
According to ActivPayroll, the act of monitoring and calculating social security contributions will involve significant extra administrative effort - so much so, in fact, that it may make more sense, and be more cost-efficient, for some organisations to simply provide their employees with a 15% lump-sum contribution rather than work out the details of any potential savings.
But the lump sum approach may not always save money. That situation will depend on an employee’s gross income, which is itself subject to social security contributions. So while it makes sense for employers to pay a lump sum into the pension scheme of staff whose wages are below the social security ceiling, if they earn more than this ceiling, the potential benefit will need to be calculated individually. Here are some examples to illustrate the point:
Example one
Some €100 (US$114) of an employee’s €2,500 (US$2,842) gross income goes to a direct insurance pension scheme by means of a salary sacrifice arrangement. Because their gross income is now €2,400 (US$2,729), their employer makes monthly personnel cost savings of €19.38 (US$2,203), which is the 19.38% social security contribution saved on the €100 salary sacrifice. By paying a 15% supplement, they could make a net saving of €4.38 (US$4.98).
Example two
An employee contributes to their pension scheme from an €8,000 (US$9,095) gross monthly income – which is above the social security ceiling - via a salary sacrifice scheme. But the new requirement for increased employer social security contributions means they do not save money by paying a 15% supplement.
Example three
An employee contributes €100 (US$114) to their pension pot on an income of €5,000 (US$5,684) a month - an amount between the 2018 ceilings for health insurance and pension and unemployment insurance – by means of a salary sacrifice scheme. In this instance, the employer will save €10.38 (US$11.80) on pension and unemployment insurance contributions but will not make a saving on health insurance as their employee’s gross income is higher than the ceiling. As a result, the €15 contribution supplement will cost the employer an additional €4.20 (US$4.77).
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
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Changes to the way German employers contribute to their employees’ pension schemes are due to come into effect at the start of next year.
The new Law to Strengthen Occupational Pensions is intended to address the challenge of fewer lower-income workers paying into state pensions by changing the way employers support their pension contributions. Employers will in future be required to pay a 15% supplement on top of employees’ pension scheme contributions (pre-tax) through a salary sacrifice arrangement.
Importantly though, this supplementary payment will only be 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 new obligation will apply.
According to ActivPayroll, the act of monitoring and calculating social security contributions will involve significant extra administrative effort - so much so, in fact, that it may make more sense, and be more cost-efficient, for some organisations to simply provide their employees with a 15% lump-sum contribution rather than work out the details of any potential savings.
But the lump sum approach may not always save money. That situation will depend on an employee’s gross income, which is itself subject to social security contributions. So while it makes sense for employers to pay a lump sum into the pension scheme of staff whose wages are below the social security ceiling, if they earn more than this ceiling, the potential benefit will need to be calculated individually. Here are some examples to illustrate the point:
Example one
Some €100 (US$114) of an employee’s €2,500 (US$2,842) gross income goes to a direct insurance pension scheme by means of a salary sacrifice arrangement. Because their gross income is now €2,400 (US$2,729), their employer makes monthly personnel cost savings of €19.38 (US$2,203), which is the 19.38% social security contribution saved on the €100 salary sacrifice. By paying a 15% supplement, they could make a net saving of €4.38 (US$4.98).
Example two
An employee contributes to their pension scheme from an €8,000 (US$9,095) gross monthly income – which is above the social security ceiling - via a salary sacrifice scheme. But the new requirement for increased employer social security contributions means they do not save money by paying a 15% supplement.
Example three
An employee contributes €100 (US$114) to their pension pot on an income of €5,000 (US$5,684) a month - an amount between the 2018 ceilings for health insurance and pension and unemployment insurance – by means of a salary sacrifice scheme. In this instance, the employer will save €10.38 (US$11.80) on pension and unemployment insurance contributions but will not make a saving on health insurance as their employee’s gross income is higher than the ceiling. As a result, the €15 contribution supplement will cost the employer an additional €4.20 (US$4.77).
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
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