The company pension scheme in Germany
Alongside statutory and private pensions, company pension schemes are the third pillar of old-age provision in Germany. A company pension scheme exists if an employee is promised retirement, disability or survivors' benefits by the employer on the occasion of their employment (Sec.1 (1) sentence 1 Works Constitution Act).
Old-age provision is divided into a accumulation phase and a benefit phase. In the accumulation phase, the retirement pension is financed by contributions paid by the pension beneficiary and/or their employer to the pension provider. In the benefit phase, the pension provider pays the agreed upon benefit to the company pensioner in the form of a monthly pension - possibly with an additional partial lump-sum payment - or a one-time lump-sum payment.
In Germany, old-age provision is divided into 5 implementation schemes:
State subsidies for company pension plans
Since 2022, employees have been entitled to deferred compensation in the company pension scheme. In this case, employees take a portion of their gross salary and have this amount paid into their company pension scheme via their employer. Both employees and employers benefit from state support: The reduced gross salary results in lower taxes and social security contributions.
In general, the employees themselves decide how much they want to pay into their company pension plan. However, if the contribution is to remain tax-free, there are rate ceilings. These are based on the West statutory pension insurance's contribution-assessment threshold (2022: 84,600 euros per year) and apply to the pension fund, pension pool, and direct insurance implementation schemes. 8 % can be paid in tax-free, while 4% can be paid without any social insurance contributions.In the case of the direct commitment and support fund implementation schemes, the tax-exempt contributions are unlimited. For social insurance contributions, the limit is 4%, as is the case with the other types of old-age provision.
For all implementation schemes, the pension in the benefit phase is fully liable to tax and
social insurance contributions under statutory health and long-term care insurance. If, on the other hand, the contributions to the company pension scheme are made from one's net salary, the Riester subsidy can be claimed in the case of the pension fund, pension pool, and direct insurance implementation schemes. In this model, up to 2,100 euros per year are deductible as a special expense in the income tax return during the accumulation phase - in addition to the basic and child allowances. In the payout phase, the pension has been exempt from social insurance contributions since 2018.
Implementing software-supported accounting for company pensions
Calculating wage tax, church tax, and solidarity surcharge
If, according to the contract, the company pension is paid out as a monthly pension - possibly with a partial lump-sum payment - or as a total lump-sum payment, this must be taxed downstream.
The assessment basis for wage tax is the amount of the company pension or lump-sum payment, reduced by tax allowances. The wage tax of the remaining amount is calculated using the formula of the income tax scale according to Sec. 32a (1) Income Tax Act, taking into account the individual wage tax deduction characteristics (see below).
For the software-supported calculation of the wage tax, the Federal Ministry of Finance provides the software manufacturers with a program flow chart for the wage tax deduction.
The pensioner's individual wage tax deduction characteristics that are necessary for the calculation
For company pensioners who belong to a denomination eligible for church tax collection, the church tax is levied on a pro rata basis from the wage tax. Depending on the federal state, between five and nine percent church tax is levied.
The solidarity surcharge that was previously due, amounting to 5.5 percent of income, will be eliminated for low- and middle-income earners as of January 2021.
Calculating contributions to statutory health and long-term care insurance
Less a monthly allowance that is currently 164.50 euros and only applies to the health insurance fund,
the full contributions to health and long-term care insurance are to be paid on the company pension in the case of company pensioners with statutory insurance (an exception is the Riester-subsidized company pension scheme). However, this only amounts to the pension insurance's (West) contribution assessment limit, which in 2022 is 4837.50 euros per month
Within the above limits, health and long-term care insurance contributions are calculated by applying fixed contribution rates to the pension amount in each case (in 2022: health insurance=14.6% + individual additional contribution rate for health insurance, long-term care insurance=3.05% + a supplemental premium of 0.35% for individuals without children).
The current contribution rates are determined by downloading the automatic contribution rate file provided by the statutory health insurance funds for import.
Legal obligation to keep books and records in the wage account
A wage account must be maintained for each company pensioner and each calendar year. In this, information on the person, such as the wage tax deduction characteristics of the company pensioner, is to be transferred, and each statement of gross pension that is taxable and liable to contribution, as well as the amount of the calculated net pension, allowances, withheld wage and church tax, solidarity surcharge and calculated health and long-term care insurance contributions are to be recorded (Sec. 4, Sec. 5 Wage Tax Implementation Regulation, Sec. 8 Contribution Scheme Regulation).
Upon termination of a company pension or at the end of the calendar year, the company pensioner's wage account shall be closed and, based on the tax authority responsible for taxation of the company pensioner, an electronic wage and tax certificate shall be sent.
The wage account must be kept until the end of the sixth calendar year following the last recorded pension payment, along with all related supporting documents (Sec. 41 Income Tax Act).
If you would like to learn how we can help with company pension accounting, feel free to reach out to our expert Thomas Dietsch, Senior Business Developer.