The New Pension System and Staff Transfers between Affiliated Companies

Written By: Lucy Ho

The new pension system that was launched on July 1st 2005 applies to two groups of employers: those subject to "mandatory application", whether they want to or not, and "voluntary participants" who choose on their own to switch from the old system. These two groups are as follows:

  1. Those subject to mandatory application: Under the principles for establishing the new pension system's "labor wages and retirement linkages", i.e., "where there is work performed and wages paid, then there should be pension funds in a certain proportion", application will be mandatory for the employer wherever there is an employee who "is an ROC citizen covered by the Labor Standards Act", receives "income from the employer" and chooses to go with the new system.

  2. Voluntary participants: Besides mandating that employers must pay pension funds, the new rules also allows employers to voluntarily participate in the new pension scheme and make the appropriate contributions on behalf of workers who are not "ROC citizens covered by the Labor Standards Act", and later apply to withdraw pension funds for them, in accordance with the Labor Pension Act.

When a reorganization requires moving employees between affiliates, it is well to consider the following factors:

Are settlement payments retirement income or salary income?

According to an explanatory letter from the Ministry of Finance (Tai-Tsai-Sui No. 9404519790), after implementation of the new pension system, regardless of whether a worker chooses to close out his/her "seniority" (i.e., retirement payout based on years-of-service) or retain it, the nature of the income received from the employer is that of retirement income, which in each case is tax exempt up to a certain amount. And again, Article 11 of the Labor Pension Act states that seniority shall be retained for workers who choose to switch to the new labor pension system and continue working for the same business entity after the Labor Pension Act took effect, provided the Labor Standards Act applies to them. By mutual agreement between employer and employee, the so-called retained seniority retirement payout must be paid upon the employee's cashing out, once the Act takes effect, or upon retirement, and the employer shall disperse the money in a lump sum (not in periodic payments) within 30 days.

Therefore, when an employee retires and the employer issues the employee's retained seniority payout in accordance with the law, as retirement income it enjoys a tax exemption up to a fixed limit. Calculation of the applicable "retirement from service seniority" must be based on "retained work seniority". Additionally, when an employee cashes out following implementation of Labor Pension Act, Article 11, item 3 of that Act provides that the agreed upon retirement payment issued by the employer at that time also constitutes retirement income, and so enjoys the same limited tax exemption; the "retirement from service seniority" is likewise based on the employee's "retained work seniority."

However, in the case where employer and employee both agree to close out the existing pension fund, if the entire amount is transferred to a Bureau of Labor Insurance individual retirement account (under the provisions of Article 12 of the "Implementation Rules of the Labor Pension Act"), then by the rules for retirement income, the money will be tax exempt along with future contributions made under the new system. This is because, if there is no immediate tax issue, the money cannot be withdrawn until the conditions for drawing on such retirement account are met, which means the money will indeed constitute retirement income.

It is worth noting that, in the opinion of the Council of Labor Affairs, before the new system came into effect, there was no regulation saying the two parties could agree to cash-out of the pension fund plan. That being the case, the MOF thinks that if a company carried this kind of agreement with an employee, and if the employee did not actually retire from the company, then the income involved does not meet the definition of "retirement income" as given in the Income Tax Law, so companies must first recognize the payment in their books as salary, and workers are ineligible for tax exemptions.

Applicability of the New Labor Retirement System

One question that has arisen is how to deal with transfers of personnel between affiliated companies under the new pension system. Under Article 57 of the Labor Standards Act, a worker's employment "seniority" is limited to service with the same business. Nonetheless, where the worker's employment seniority is transferred from the original employer because the company is reorganized or changes hands, then under Article 20 of the same Act, workers retained by the new employer must continue to have their accumulated seniority recognized by the new employer, and must make subsequent contributions. According to Article 8, item 1 of the Labor Pension Act, workers to whom the Labor Standards Act applied before the Labor Pension Act was implemented can continue to apply the Labor Standards Act rules after the Labor Pension Act took effect, but after they leave the employer they are with, they will have to use the new pension system and may not choose the Labor Standards Act's rules. Consequently, if the affiliates in question constitute independent business entities and a transfer of employees occurs between the affiliates, then in keeping with the above rules, they would have to begin applying the new pension fund scheme starting from the date of their transfer. Their new employer would have to make monthly contributions to the new pension scheme (not less than 6% of the employee's monthly wages).

That said, if the new employer wishes to look after the worker's interests and is willing to recognize the seniority accumulated under the original employer, or when the employee meets the conditions for retirement, it is permissible for the employer to make up the difference between the pension fund amounts under the old and new systems.

Tax Rules

In response to the aging of Taiwan's population, and as a way to encourage workers to prepare in advance for life in retirement, the government has issued tax incentives. Article 14 of the Labor Pension Act states: "An employee may voluntarily contribute per month, up to 6% of his/her monthly wages to his/her pension fund account. The full amount of the voluntary pension contribution made by an employee may be deducted from the employee's taxable income in the year concerned."

Moreover, a MOF directive (Tai-Tsai-Sui No. 09404538580), referring to Article 83, item 1 of the "Enforcement Rules for the Income Tax Act", states that the abovementioned voluntary contributions by employees to pension funds, up to the proscribed limits, are exempt from withholding tax. Under Article 92, item 1 of the same Act, when the obligated withholder fills in and submits a certificate of salary withholding and exemption from withholding, he/she is also exempt from declaring as salary income his/her "total contributions". The MOF will add appropriate spaces to the certificate of withholding and exemption from withholding, and to the tax filing forms, in which the obligated withholder may can fill in and report the worker's voluntary contributions.

Conclusion

Where affiliated companies are considered to be independent businesses and employees are transferred between affiliates after the system took effect, such employees must apply the new pension fund system as of the dates they are transferred, and their new employer must make monthly pension fund contributions on their behalf under the new system. However, these rules can have a huge effect on employees' seniority benefits, so labor and management need to reach an agreement in advance to avoid unnecessary disputes later on.