If you terminate an employee in Belgium, you will often have to pay them severance pay. This is calculated, in part, with reference to the employee’s salary during the notice period. It is calculated not only based on basic salary but also on “full salary”13.th It includes not only the monthly salary and vacation pay, but also all other benefits that the employee enjoys within the framework of employment. This includes contributions to your employer’s pension scheme in the 12 months prior to your retirement.
In reality, this seemingly small factor can sometimes cause unpleasant surprises. In many cases, the amount of pension contributions is unknown or even overlooked altogether when the first rough retirement calculations are made. If this element is added at a later stage, it can significantly inflate your retirement compensation if your pension plan is generous. This is often the case for older schemes or senior management schemes where employer contributions are up to 10-15%. It’s not uncommon.
This compensation is taxed very heavily.
- Employers pay Social Security contributions towards retirement benefits (no limit). The percentage is approximately 29%. The employee pays a personal social security contribution of 13.07%.and
- Retirement benefits are taxed at the average income tax rate of the employee’s last year of full-time employment (often the year prior to retirement).
There are more tax-efficient ways to process this payment. It is a lump sum payment to the pension scheme equal to the employer’s pension contributions over the period of coverage (additional portions of compensation cannot be treated in this way). same tax advantageous method). This option exists for both defined contribution and defined benefit plans. The tax benefits are:
- instead of about. 29% social security contribution, the employer only pays him 8.86% special social insurance premium and he 4% insurance premium.and
- Employees do not pay taxes or social contributions immediately, but only upon retirement when their pension funds are paid. At this point, her social contribution is 3.55%, and the so-called “solidarity” social contribution is up to 2%. , taxes are paid ranging from 10% to 16.5%, which overall is much lower than the average tax rate applied to retirement funds.
Sounds simple, but as always, there are some ifs and buts.
- Incorporating pension contributions into a pension scheme, rather than as part of the retirement allowance, is only possible if the pension scheme rules allow it. If your plan’s rules do not already provide this option, you must modify the rules to allow this option. This is a very simple procedure, but it takes time (see paragraph 3 below). Therefore, we recommend proactively considering this issue before planning downsizing with significant severance payouts.
- If this option is included in the planning rule, it applies to all employees who are terminated. This is not an employee’s choice. Employees cannot opt out and choose a severance payment route. If the pension scheme rules allow this type of payment, it is actually required.
- If you have read this blog and are considering this option and would like to change your company’s planning rules, please note that any changes to your company’s planning rules should be the subject of prior consultation with your company’s employee representatives. Please also consider. In Belgium, this is the works council or, if it does not exist, the health and safety committee, or if it does not exist, the trade union delegation. This consultation allows employee representatives to give non-binding advice regarding the proposed changes, but nothing more. Employees can argue that this is the worst idea ever brought to them. You can still resolve the issue, but you need to make sure that: This (written) input from them before doing so.
If you do not request this advice, any decision to change plan rules may be overridden by employee challenge within one year of the decision.
In companies without employee representatives, consultation is replaced by the following obligations: Inform Employees before making changes.
If you are tempted by the option of changing your plan’s rules, do a more extensive scan-through to ensure your plan’s rules are up to date and continue to meet your company’s needs in terms of compensation. It may also be time to offer it. policy. Of course, we will be happy to help you with this exercise.