What is a reasonable Private Benefit Plan?

On April 10, the Secretary of Finance, with the recommending approval of the Commissioner of Internal Revenue, issued Revenue Regulations (RR) No. 15-2025, now known as the “Revised Private Retirement Benefit Plan Regulations.” RR No. 15-2025 combines and repeals decades-old regulations and circulars implementing Republic Act No. 4917.

Tax incentives on retirement benefits have been recognized as early as 1954 with the enactment of the Social Security Law. It has been the policy of the Philippines to establish, develop, promote, and perfect a sound and viable tax-exempt social security, with a view to promoting the well-being of Filipino families in the spirit of social justice. Further to this objective, Republic Act No. 4917 (RA 4917) was passed in 1967, embodying the concept of a “Private Benefit Plan.” RA 4917 expressly provides that retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer, shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy, or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action.

RA 4917 defined a “reasonable private benefit plan” to mean a pension, gratuity, stock bonus, or profit sharing plan maintained by an employer for the benefit of some or all of their officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

On the requisites to qualify as a “reasonable private benefit plan,” it is observed that RR No. 15-2025 adopts the same criteria listed in Revenue Regulations No. 01-68. RR No. 15-2025 reiterates that the plan must: involve a written program, be permanent and continuing, contain details on the coverage, involve a contribution from the employer, officials and employees, involve impossibility of diversion, be non-discriminatory, provide for non-forfeitable rights and expressly provide for forfeitures in case of severance of employment, death, or other causes.

RR No. 15-2025, however, removed one requisite found in Revenue Regulations No. 01-68, which is the requirement that the fund be administered by a trust. RR No. 15-2025 now recognizes that a Private Benefit Plan can be “non-trusteed.” For non-trusteed plans, a copy of the Deposit Administration Contract Deferred Annuity Contract executed by and between the employer, the insured or policyholder, and the Insurance Company as the insurer must be submitted. RR No. 15-2025 defines a “Trusteed Retirement Plan” as a plan whose assets/funds are being held, managed, and administered by a separate entity or group of individuals that is designated or appointed as trustee by an employer for the benefit of its employees. Retirement plans that do not fall under the definition are classified as “Non-Trusteed Plans.” The trust structure reflected in the regulations effectively incorporates the exemption of employees’ trusts from income tax found under Section 60(B) of the Tax Code.

On the Impossibility of Diversion, RR No. 15-2025 adopts the interpretation in RR No. 01-06 that “[n]o specific limitations are provided in the law with respect to investments which may be made on the fund.”

Generally, the fund may be used by the trustee to purchase investments permitted by the trust agreement. However, it was clarified that the threshold for determining whether a corporation is controlled by the employer changed from 50% or more to 51% or more of the total combined voting power of all classes of stock or total value shares. It was also added that “[f]or the avoidance of doubt, the Retirement Fund shall not be used to invest/deposit any of the employer’s business ventures to maintain the separation of the employee’s trust fund from that of the employer’s trust.”

RR No. 15-2025 also now imposes a 30-day period required to file an application for a Certificate of Qualification with the Bureau of Internal Revenue (BIR), counted from the date of the effectivity of the Private Benefit Plan. Failure to comply with the period will result in penalties being imposed upon the employer. RR No. 15-2025 however clarifies that pending the employer’s application with the BIR, the retirement benefits received by retiring employees or investment income received by the Retirement Fund shall be exempt, obtain BIR approval before availing of tax benefits, and imposed rules to ensure trust fund assets were used solely for the benefit of covered employees. However, should the employer’s application be denied by the BIR, the employer/trust shall be directly and solely liable for any deficiency in income taxes. It is also clarified that the tax incentives/privileges under a Tax Qualified Plan shall retroact to the date of effectivity of the Private Benefit Plan.

In contrast to its predecessor, RR No. 15-2025 presents a more detailed process for guiding private firms. It recognizes new plan types available in modern setting, such as provident funds, and formally institutionalizes multi-employer plans and non-trusteed plans. However, while RR No. 15-2025 presents comprehensive revisions, it is yet to be seen if the listed requisites and conditions set forth in the regulations are “reasonable.” Certainly, while limitations have been set forth, it must not be forgotten that the very purpose of the tax incentives for “Private Benefit Plans” is the policy of the State to encourage and promote a sound and viable tax-exempt social security for the well-being of Filipino families in the spirit of social justice.

The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.

Joseph Patrick M. Tan is an associate of the Tax department of the Angara Abello Concepcion Regala Cruz Law Offices.

jmtan@accralaw.com

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