1. What is a retirement plan?
   
   A retirement plan is a plan established by an employer for the purpose of providing  benefits to its  employees upon  their separation or retirement.  A retirement plan which has been determined by the Bureau of Internal Revenue (BIR) to have complied with the requirements of law for tax exemption is referred to as a qualified retirement plan.
    
2. What are the different ways of setting up a retirement plan?
   
   A company looking at establishing a retirement plan can approach it in several ways:
    
   
   1. Self-managed – The company may set aside a certain amount or seed money where it can readily draw funds to, at least, partially defray the benefits of its retiring  employees.  These funds are generally invested in deposit or money market  instruments.
   2. Insured -  The company may opt to obtain insurance policies or pension plans for its
      qualified employees where it pays the premium.  Upon retirement, the employee gets 
      the proceeds from the matured insurance/pension plan from the issuing insurance or pre-need company.
   3. Trusteed -  The company appoints a trustee, usually the trust department of a bank, to
      hold, manage and administer the retirement  fund.  The trustee invests the funds in
      accordance with the set investment guidelines and administers the plan rules and
      regulations. 
       
3. Why set up a retirement plan?
   
   The most compelling reason for setting up a retirement plan is to comply with  Republic Act  No. 7641, otherwise known as the Retirement Pay Law.  Said law mandates all private corporations (except those engaged in the retail, service and agricultural sectors) with, at least, ten (10)  regular employees, to give retirement pay to their qualified employees equivalent to at least  22.5 days’ salary for every year of service.  Qualified employees are defined as all regular employees who are at least sixty (60) years of age, and shall have served the company for, at least, five (5) years
   
   Apart from complying with the legal requirements of providing separation benefits to employees, the following are also major considerations favoring the immediate establishment of a qualified retirement plan, to wit:
    
   
   • To reduce future employer liabilities by way of earnings generated by the retirement fund
      
     Contributions to the retirement fund are invested to earn optimal rates of return.  Earnings on these contributions are tax-exempt for BIR-qualified plans. Since defined benefits to employees are not affected by the level of fund income, these earnings and the accompanying tax savings serve to reduce the company’s  future contributions  to the retirement fund.
      
   • To take advantage of tax benefits attendant to an early set-up
     
     Retirement fund outlays for the current year (otherwise known as normal cost or current service liabilities) become fully deductible against taxable income only when done through a qualified trusteed retirement fund. The company can also use as tax deduction amortization up to a maximum of 10% or 1/10 of total past service liabilities in any given year. This means that by deferring the decision to set-up a retirement fund, the company, in effect, foregoes potential tax savings that bigger contributions to the retirement fund may provide.
      
   • To ease the impact of sudden and unexpected separation of employees on the company’s cash flow
      
     Small periodic contributions are hardly felt by the company especially when made during the early stages of its corporate life. These small contributions accumulate over time to provide a buffer for large separation-related outlays which may come at a most inconvenient time in the future.
   
    
4. What is the best option for setting up a retirement plan?
   
   From among the various ways of establishing retirement plans, a reasonable, trusteed retirement plan duly approved by the Bureau of Internal Revenue (BIR) has been ascertained to be the most advantageous in terms of :
   
   
   • Tax Benefits
     
     To the employer
     
     

     Unlike other alternatives in putting up retirement plans, current contributions to a qualified trusteed retirement plan are fully deductible against taxable income.  In addition, ten percent (10%) of contributions for past service liabilities are also deductible if amortized for a period of not more than 10 years.  Moreover, interest income earned by the retirement fund are also exempted from final taxes. 

     
     To the employee
     
     

     In accordance with the provisions of Republic Act  No. 4917, the employee’s retirement benefits under a qualified trusteed plan can also be tax-exempt under the following circumstances:  (a) if the retiring employee is aged, at least, 50 years at the time of retirement, has rendered at least 10 years of continuous service with the same employer, and is availing of  retirement benefits for the first time; (b) if the cause of separation from the employer is due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee.
     
     Moreover, retirement benefits received by an employee of private firms in accordance with a reasonable private benefit plan shall not be subject to  attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except  to pay a debt of  the employee concerned to the private benefit plan or that arising from liability imposed in a criminal action.

     
      
   • Lower Costs
     
     Outlays involved are generally lower with trusteed retirement funds. This is because remittances require only the funding for benefits while the schedule of remittances can be arranged in such a way as to coincide with company cash flows. Past service liabilities may also be amortized for as long as 20 years.
      
      
   • Non-forfeiture of Contributions
     
     Under a trusteed retirement fund, contributions meant to provide benefits for employees who leave without qualifying for retirement benefits remain with the fund to be used to reduce future liabilities.
     
      
   • Non-reversion of contributions
     
     Trusteed retirement fund contributions are irrevocable to their qualified beneficiaries. Funds already contributed cannot revert to the employer until all the liabilities of the fund under the plan have been fully satisfied.
      
      
   • Flexibility of payments
     
     The amount and timing of contributions to the retirement fund may vary depending on the company’s cash flow. In cases when the company is encountering temporary tight financial situations, a more flexible remittance schedule may be worked out with the trustee
      
      
   • Better fund management
     
     Trusteed retirement funds have few restrictions insofar as allowable investment instruments are concerned. This provides the fund manager with a wide degree of latitude in selecting the appropriate investment outlets and developing its investment strategy. More importantly, the employer could also have a direct hand in the management of their retirement fund by stipulating investment policies and parameters to be followed by the trustee or Investment Manager. However, it must be noted that any limitation that will be imposed on the trustee’s or Investment Manager’s discretionary investment powers may result in missed opportunities especially during periods of market volatility.
   
    
     
5. What are the steps involved in setting up a trusteed retirement plan?
   
   To establish a trusteed retirement plan, the following steps shall be undertaken:
   
   Step 1.  Drafting of the Retirement Plan Rules and Regulations
   

   This will involve the determination by the company of the mechanics/procedures that will govern the operation of the retirement plan including, among others,  the eligibility requirements of members, types of benefits (e.g., separation, death and disability), the amount of retirement benefits to be given.

   Step 2.  Commissioning of an actuarial valuation study
   

   In order to ascertain the estimated annual cost, normal cost, and past service liabilities arising from the creation of a retirement plan, there is a need to engage the services of an actuary.  The actuary shall  be the one to prepare the actuarial valuation study based on employee data to be provided by the company, e.g., employees’ age, gender, salary, number of years in service, among others.  Such actuarial valuation study  is also among the documentary requirements that must  be submitted to  the Bureau of Internal Revenue (BIR) when applying for tax qualification.

   Step 3.  Appointment of the Retirement Plan Trustee
   

   For trusteed retirement plans, there is a need to appoint a trustee who shall be responsible for its administration and management.   The company may opt to create a Board of Trustees comprised of selected company officials and then  engage the services of an Investment Manager who shall be responsible for managing the cash and/or assets contributed to the retirement fund.  Another option is to appoint an institutional trustee, specifically the trust department of a  bank, who shall perform both plan administration and fund management functions.

   Step 4.  Execution of the Trust Agreement and funding of the trust
   

   If an institutional trustee is appointed, a Trust Agreement shall be drafted for execution between the company and the trustee.  The Trust Agreement will contain the terms and conditions of the trust as well as the powers and authorities to be vested on the trustee, among others.  With the execution of  the Trust Agreement, the company shall commence making contributions to the trust based on the annual cost indicated in the actuarial valuation study.

   Step 5.  Securing a tax qualification letter from the BIR
   
   

   The trusteed retirement plan must be submitted to the BIR for approval and the issuance of the corresponding tax qualification.  The BIR ruling will enable  the retiring employees who comply with the pertinent requirements to enjoy tax exemption of their retirement benefits and at the same time  exempt the fund’s earnings  from final taxes.  
    

6. What are the cash outlays involved in setting up a trusteed retirement fund?
   
   The following costs are usually incurred when setting up a retirement plan:
   
   
   • Fees payable directly to the actuary who will prepare the actuarial valuation study
   • Application fee payable directly to the BIR for the processing of the  tax exemption qualification
   • Contributions to the trust fund. Such contributions may be staggered on a monthly, quarterly, or semi-annual basis depending on the company’s cash flow.
   • Trust fee payable to the Trustee or Investment Manager for the management of the Retirement Plan payable on a quarterly basis and chargeable against the retirement fund.
   
   How long will the company make contributions to the retirement plan?
   
   The company must contribute to the retirement fund throughout its existence.  These contributions, however, are more like forced savings rather than costs.  Contributions to a trusteed retirement plan are deductible as a business expense.  Current contributions are deducted against taxable income and these tax savings as well as earnings that accumulate over time effectively reduce the amount of fund contributions of the company.
   Can the company amend the benefits after establishing the retirement fund?
   
   Separation or retirement benefits can be upgraded while diminution of benefits is not allowed.  In case the employer decides to give additional benefits to its employees, another actuarial valuation study shall have to be conducted.  Based on the actuarial results, fund contributions may have to be adjusted to cover the new package of benefits.  On the other hand, the amended or revised plan rules and regulations shall have to be submitted to the BIR for it to re-assess the continued tax qualification of the retirement plan.  

Setting up a retirement plan is not as difficult as it might seem if you have the right partner to guide you at each step of the way.  For more information, please visit any China Bank branch or call China Bank Trust and Asset Management Group - Sales and Marketing Division at (632) 885-5841 / 672-9633 / 672-9634 / 230-6904, or email online@chinabank.com.ph