Supplementary pension plan and indemnity in lieu of notice

More and more employees have the benefit of a supplementary pension plan through their employer, either through a group insurance policy managed by an insurer or through a pension plan managed by an institution for occupational retirement provision (IORP or also called a pension fund). Often the question arises of what to do when terminating the contract of an employee. The supplementary pension plan has an impact on the cost of severance. A cost that needs to be analysed from several angles and can be optimised where possible. Valérie Rogge, Legal Consultant at Vanbreda Risk & Benefits, explains.

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An employment contract can be terminated in two ways. Either the employee is asked to work a notice period or the employment contract is terminated with immediate effect with payment of an indemnity in lieu of notice. It goes without saying that the end of the employment contract also means the end of the supplementary pension accrual.

  • Termination with notice: if the employee is asked to work a notice period, the employee remains under contract and all rights and obligations continue, including membership of the supplementary pension plan. The employee in question remains covered by the pension plan until the end of the notice period, which specifically means that the employer has the obligation to continue paying contributions for the accrual of the supplementary pension for as long as the employee is in the employer’s service. The employee’s personal contributions, where appropriate, continue as well.
  • Termination with indemnity in lieu of notice: if the employer chooses to terminate the employment contract with immediate effect, the obligation to pay employer’s contributions ceases immediately as well. The employer must pay a compensatory indemnity in lieu of notice for the duration of the notice period that the employee is not required to work.

Calculation of indemnity in lieu of notice

Case law has ruled on several occasions in the past on considering employer’s contributions as a wage component that - especially if specifiable - should be taken into account when calculating the indemnity in lieu of notice. Specifically, the base annual salary for calculating the indemnity in lieu of notice will increase, since the accrual of the supplementary pension over the last 12 months of employment must be taken into account.

One-off employer’s contribution on termination of employment

One possible approach to the supplementary pension plan in the context of an indemnity in lieu of notice is a one-off premium payment during the period covered by the indemnity in lieu of notice.

One option in the case of immediate termination of the contract with payment of an indemnity in lieu of notice is not to include the employer’s contributions in the basis for calculation of the indemnity. In this case, the premiums are injected into the former employee’s supplementary pension plan through a one-off deposit. The deposit then equals the sum of all the employer’s contributions that should have been paid during the period covered by the indemnity in lieu of notice. If the supplementary pension plan is financed by employer’s and employee’s contributions, the employee’s contributions will also be paid into the pension plan and deducted from the indemnity in lieu of notice.

This is an advantageous procedure for several reasons:

  • The more favourable deductions of 8.86% special employer’s contribution and 4.4% premium tax remain due on the deposited sum as usual;
  • Neither the employer nor the employee is liable for ordinary social security contributions on this deposit, unlike in the case of the indemnity in lieu of notice;
  • The employer’s contributions paid are tax deductible for the employer, while the employee is not taxed on them at the time of deposit;
  • For the personal contributions paid, where appropriate, the employee is entitled to a tax deduction;
  • The former employee’s supplementary pension plan continues to accrue and is taxed more favourably later on.

Inform your employee

This procedure is possible only if the pension plan has explicitly, correctly and clearly defined this payment and makes it applicable to all members. Moreover, it is crucial that the employee is clearly informed about this. In labour law there are many mandatory legal provisions to be taken into account.

Informing your employee in due course is an important step in the exit process in order to avoid the employee claiming the employer’s contribution twice: a first time by deposit into the pension plan, a second time by inclusion in the indemnity in lieu of notice.

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