Belgium – the synergy between pension contributions and the severance indemnity

When you terminate an worker in Belgium you’ll typically have to pay a severance indemnity.  That is calculated partly by reference to the worker’s pay for his discover interval.  It’s calculated on the “full wage”, together with not simply base wage, 13^th month and trip pay, but in addition all different advantages loved by the worker within the framework of their employment. This contains the employer’s contributions to the pension scheme over the course of the 12 months previous to termination.

In apply, this seemingly small ingredient can generally trigger disagreeable surprises: typically, on the time when the primary tough severance computation is completed, the quantity of the pension contributions will not be identified, or is even missed fully. When this element is added in a later stage, it will probably materially inflate the severance indemnity if the pension plan is beneficiant, which is usually the case for older plans and/or plans for senior managers, the place employer contributions of as much as 10-15 % usually are not unusual.

This indemnity is taxed fairly closely:

• the employer pays social safety contributions on the severance fee (no cap), at roughly 29%. The worker pays a private social safety contribution of 13.07%; and

• the severance fee is taxed on the common earnings tax charge of the worker’s final 12 months of normal employment (typically the 12 months previous to the termination).

There’s a extra tax environment friendly option to take care of this fee, and that’s to make a lump sum fee into the pension scheme equal to the quantity of the employer’s pension contributions for the indemnity interval (further components of the indemnity can’t be handled on this similar tax-advantageous method). That possibility exists for each outlined contribution and outlined profit plans. The tax advantages are appreciable:

• as a substitute of approx. 29% social safety contributions, the employer solely pays a particular social safety contribution of 8,86% and a premium tax of 4%; and

• the worker doesn’t pay taxes or social contributions instantly however solely at retirement, when the pension capital is paid out: at this level, a social contribution of three,55%, a so-called “solidarity” social contribution of as much as 2%, and tax ranging between 10 and 16,5% might be due, however all in all nonetheless far lower than the common tax charge in any other case making use of to the severance indemnity.

Appears like a no brainer, however as all the time there are a few ifs and buts:

1. Paying the pension contributions into the pension plan as a substitute of as a part of the severance fee is feasible provided that the pension plan guidelines permit it. In case your plan guidelines don’t present this selection but, an modification of the principles might be required to permit this selection. That may be a easy sufficient process, nevertheless it takes a while (see paragraph 3 under), so it’s suggested to look into this matter proactively, effectively earlier than you’re planning any redundancies with hefty severance funds.

2. If the choice is included within the plan guidelines, it would apply to all staff who’re made redundant. It’s not a selection that the worker will get to make – staff can’t decide out and take the severance fee route.  If the pension plan guidelines allow this type of fee, it’s in impact really then required.

3. If this weblog evokes you to discover this selection and alter the corporate plan guidelines, please additionally think about that each change to the plan guidelines must be the subject of prior session with the worker representatives in your organization.  In Belgium that is the Works Council, or if there’s none, the Well being & Security Committee, or within the absence of that too, the union delegation. The session permits the worker representatives to tender their non-binding recommendation on the proposed change, however no extra: they will opine that it’s the worst concept that was ever dropped at them, and you’ll nonetheless energy by way of, however it’s essential have obtained this (written) enter from them earlier than doing so.

   If you don’t request this recommendation, the choice to vary the plan guidelines could also be nullified by worker problem inside the 12 months after it was taken.

   In firms with out worker illustration, the session is changed by an obligation to inform the workers prior to creating the change.

If you’re tempted by the choice of adjusting your plan guidelines, this will even be the time to offer them a wider scan-through to make sure that they’re nonetheless updated and proceed to fulfill the wants of the corporate when it comes to its remuneration coverage. We are going to in fact be blissful to help you on this train.