Are employee pension plan payouts taxable?

For most employees, pension plans are their post-retirement safety nets, helping ensure that they have enough resources to live comfortably in their golden years. While plans can have different policies and provisions, one common question that arises in taxpayers’ minds is whether their “nest eggs” are subject to income tax?

The proverbial but technical answer is — IT DEPENDS. The taxability of the payouts from employee pension plans depends on a number of factors, including the nature of the payout.

In general, benefits are taxable.

Section 60 (B) of the Philippine Tax Code, as clarified by Revenue Memorandum Circular (RMC) No. 39-14, provides that the entire amount of benefits paid by a pension, stock bonus or profit-sharing plan of any employer for the benefit of employees, is taxable on the part of the employees in the year so distributed.

The same RMC explained that for non-contributory pension plans, the dividends distributed by the pension fund to the covered employees are subject to income tax in the year so distributed. If the employee covered by the pension fund resigned and received benefits from the fund that do not qualify as tax-exempt separation or retirement benefits, the entire amount of benefits received is subject to income tax in the year so distributed.

For contributory pension plans, where the employee also contributes to the plan, the RMC states that dividends distributed to the covered employees do not constitute a return of the employees’ voluntary contributions; hence, they are subject to income tax in the year so distributed.

Return of employee’s personal contributions and retirement benefits may be tax-exempt.

Under RMC No. 39-14, it was made clear that payouts representing a return of an employee’s personal contributions to the fund are not taxable. Retirement benefits may also qualify as exempt from income tax when the conditions under the Tax Code are satisfied.

AN ILLUSTRATION
If an employee contributed a total of P60,000 to the pension fund and upon his resignation received benefits from the fund in the amount of P300,000 that do not qualify as tax-exempt separation or retirement benefits, the P60,000 constitutes a return of his contribution to the fund and is exempt from income tax. However, the P240,000 that the employee received in excess of his contribution (P300,000 less P60,000) is subject to income tax in the year so distributed.

Any income or earnings from investments of the pension fund, such as dividends, are taxable to the employee-member in the year so distributed if the distribution is effected before his retirement from the company. On the other hand, upon the retirement of the employee and in accordance with Section 32 (B) (6) of the Tax Code, the total benefits which the employee shall receive consisting of his personal contributions, the employer’s counterpart contributions and the income of the fund to which the employee is entitled and is distributed to him shall be exempt from income tax. [BIR Ruling DA-(TSF-016) No. 542-08 and BIR Ruling DA No. 377-04]

REQUIREMENTS FOR EXEMPTION
Section 32 (B) (6) of the Tax Code outlines the following requirements for retirement benefits received by officials or employees of private companies to be tax-exempt:

1. The benefits received must be in accordance with a reasonable private benefit plan maintained by the employer;

2. The retiring official or employee must have been in the service of the same employer for at least 10 years and the employee should be at least 50 years old at the time of his retirement; and

3. Such tax exemption privilege on retirement benefits must be availed of by an official or employee only once.

Revenue Regulations (RR) No. 1-68, the Private Retirement Plan Regulations, as amended by RR No. 1-83, specifically requires that before availing of the privileges afforded by pension, gratuity, profit sharing, or stock bonus plans, the employer must first obtain a BIR certification or ruling to the effect that the qualification of the plan for tax exemption has been determined. Thus, it is important that the employer secures from the BIR a certification of qualification or a ruling, which shall then serve as a basis that the company’s retirement plan indeed qualifies as a reasonable retirement plan, which is an essential element for tax exemption.   

Likewise, in the absence of any retirement plan, retirement benefits received by employees under Republic Act (RA) No. 7641 are also exempt from income tax under Section (B) (6) of the Tax Code.

RA 7641 provides that any employee may be retired upon reaching the retirement age established in a collective bargaining agreement or other applicable employment contract. In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of 60 years or more, but not beyond 65 years which is declared as the compulsory retirement age, and who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least 6 months being considered as one whole year.

While the above discussion outlines the possible exemption of payouts from employees’ pension plan, the tax implications on how these payouts will be spent, invested and enjoyed could also prove to be interesting.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Jim R. Macatingrao is a Tax Partner of SGV & Co.