The topics covered in our current newsletter are: “Tax- and Social Security-free Inflation Compensation”, “Introduction of a Citizen’s Income”, “BMF Letter on the admissibility of Unit-linked reinsurance for Support Funds” and “Case Law: BAG on Employer Subsidies in the Context of Deferred Compensation”.
Table of Contents
- Tax- and Social Security-free Inflation Compensation
- Introduction of a Citizen’s Income
- BMF Letter on the admissibility of Unit-linked reinsurance for Provident Funds
- Case Law: BAG on Employer Subsidies in the Context of Deferred Compensation
Inflation Compensation Exempt from Taxes and Social Security Contributions
To offset negative economic consequences of the Ukrainian War, in particular the significant increase in energy costs, the German government passed the “Third Relief Package” at the beginning of September 2022. As part of this package the German government announced that it would require additional payments to be made by employers to their employees up to the amount of €3,000 (tax- and social security-free).
According to Chancellor Olaf Scholz, this tax- and social-security-free payment – often referred to as an inflation premium – enables employers to make a payment in addition to an employee’s normal income to alleviate the financial burden caused by increased prices due to inflation. The inflation premium is comparable to the Corona premium, which allowed employers to pay their employees a special payment of up to €1,500 (tax- and social security-free) from the beginning of March 2020 until the end of March (2022) .
Introduction of a “Citizen’s Income” as a Reform of the Hartz IV Benefit
The German government has also decided to introduce a “citizen’s income” to replace the current system of basic benefits for jobseekers – better known in Germany as Hartz IV – which will take effect as of January 1, 2023. This is the central project of the coalition for social reform.
The plan is to increase the standard rate to €502 per month for single adults (previously €449). In addition, the possibility of reducing benefits in the future is to be severely restricted; up to now, this was possible if appointments at job centers were not attended, or reasonable work was not accepted. These sanction possibilities were the substantial point of the Hartz IV reform at the time: to impose these obligations onto the unemployed to insentivize them to resume employment.
Further points of the reform are: the admissibility of possessions up to €60.000 within two years of the payout of this benefit. As well as, the possibility of getting housing refunded during the first two years, even if this is considered too large of a sum. And finally, an additional income increase between €520 and €1,000 amounting to 30% of income (instead of the existing 20%) may be kept.
Critics fear that the reform will create false incentives, cement an expectation of benefits and make unemployment much more attractive. However, the reform is still a long way away from introducing an unconditional basic income.
BMF Letter on the Admissibility of Unit-Linked Reinsurance Policies for support funds
In a letter dated August 31, 2022 (GZ: IV C 6 – S 2144-c/19/10002 :004), the German Federal Ministry of Finance commented on the permissibility of a unit-linked reinsurance policy to cover support fund obligations in accordance with Section 4d of the EStG. This was preceded by a corresponding inquiry from the German Insurance Association (GDV). Until now, unit-linked reinsurance policies for congruently reinsured support funds have usually been regarded as inadmissible by tax authorities (even though individual tax offices have already been open to the argumentation now confirmed by the BMF).
According to the principles of the BMF letter, unit-linked reinsurance policies are now permissible. The BMF has stated that
- unit-linked reinsurance policies are recognizable reinsurance policies within the meaning of Sec. 4d (1) Sentence 1 No. 1 (c) Sentence 1 of the EStG, and guarantee minimum benefits
- in the case of a congruent insurance-linked defined contribution plan, the contributions, amounting to the contributions in the unit-linked reinsurance plan are funded by the sponsoring company,
- the requirements for full congruent reinsurance pursuant to Sec. 4d (1) Sentence 1 No. 1 (c) Sentence 1 of the EStG are met by determining the permissible and actual fund assets pursuant to Sec. 5 (1) No. 3 (e) Sentence 2 of the KStG and this is to be recognized as a permissible reinsurance policy, and
- the actual and permissible fund assets can be set at the same level and there is no surplus or shortfall in cover.
This means that fully reinsured support funds can offer benefits close to the German capital market in the future. In view of the persistently low interest rate environment and the increasingly limited availability of classic guaranteed life insurance products, this is a welcome development. However, the BMF letter once again explicitly points out that the tax authorities of the federal states are responsible for assessing the respective individual tax cases. It is therefore up to them to assess the contractual agreements concluded in individual cases, whilst considering the general principles, and to evaluate them for tax purposes. An open follow-up question is, can the amount of the minimum benefit be guaranteed in the context of a defined contribution plan? The BMF has not yet commented on this.
Case law: Federal Labor Court Rules on Disputed Question on Employer Subsidy in the Context of Deferred Compensation
In two judgements, the Federal Labor Court ruled on open questions regarding employer’s allowances. Specifically, the case concerned the employer’s obligation to pay an employer subsidy amounting to 15% of the converted remuneration in accordance with Section 1a (1a) of the German Occupational Pensions Act (BetrAVG) in 2019 and 2020. This entitlement was introduced by the Betriebsrentenstärkungsgesetz (Company Pension Strengthening Act) 2018, whereby the statutory regulation deviated from to the disadvantage of employees by collective agreement, Section 19 (1) of the BetrAVG.
The BAG has now clarified that for the transitional period from December 31, 2021, no further employer allowance can be demanded on the basis of the statutory transitional provision in Section 26a of the BetrAVG for collective pension agreements created from 2008 – as this occurred before the adoption of the Betriebsrentenstärkungsgesetz (Company Pension Strengthening Act) in 2018. The 2018 act regulates an entitlement of employees to deferred compensation as well as additional benefits from the employer into their deferred compensation. Significantly, the BAG also stated that an entitlement to the employer’s supplement is also excluded after December 31, 2021 if a company collective agreement from 2019 refers to this collective agreement from 2008.
In contrast, the BAG left open whether the collective pension agreement from 2008 itself (i.e. without reference in the company collective agreement from 2019) can already make use of Section 19 (1) of the BetrAVG and modify the employees’ entitlement, although this was concluded before the Betriebsrentenstärkungsgesetz (Company Pension Strengthening Act) was entered into force.