A Retirement Plan is established by an employer for the purpose of providing benefits to its employees upon their separation or retirement. It is part of the compensation package of employers to its employees. 

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 or has been issued with a “Certificate of Qualification as a Reasonable Employees’ Retirement Benefit Plan” is referred to as a qualified retirement plan. 

 Apart from compliance with Republic Act No. 7641 or the Retirement Pay Law which 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, setting up a Retirement Plan also provides the following benefits to the company: 

a. Take advantage of tax incentives

To the employer 
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 while interest income earned by the Retirement Fund may also be exempted from final taxes. 

To the employee 
The employee’s retirement benefits under a qualified trusteed plan may also be tax-exempt 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, provided that the retiring employee is eligible under the company’s Retirement Plan. 

b. Reduce future 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. 

c. Ease the impact of sudden and unexpected separation of employees on the company’s cash flow
Periodic contributions are hardly felt by the company especially when made during the early stages of its corporate life. These contributions accumulate over time to provide a buffer for large separation-related outlays which may come at a most inconvenient time in the future. 

d. Improve Employee Retention and Morale
Having a Retirement Plan gives the employees extra incentive to stay with the company. It also provides the employees something to look forward to and sense of financial security upon retirement or separation from the company. 

Moreover, retirement benefits received by an employee of private companies 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 Retirement Plan or that arising from liability imposed in a criminal action. 

A Retirement Plan may be set up using either one or a combination of the following types:

a. Non-Contributory/Defined Benefit Plan (Pension Fund)
This is a Retirement Plan where the contributions required for the Fund solely comes from the employer. The benefits received by the employees are specific and defined. 

b. Contributory/Defined Contribution Plan (Provident Plan)
This is a Retirement Plan where both the employer and employees make fixed contributions to the Fund which will be distributed to the employees upon separation, retirement or incapacity. The benefits to the employee are dependent on the contributions and income, if any, of the Fund. 

The minimum amount required to open a Retirement Fund account with China Bank is Php1.0Mn. However, the estimated amount of funds that the company needs to contribute to be able to fulfill its obligations to its employees under a Defined Benefit Plan will depend on the actuarial valuation report. The employer though may still need to top up in case the contributions are insufficient to comply with the benefits of the employees required by the law. 

A Retirement Plan may be set up under the following arrangements: 

a. Trusteed
A Trusteed Retirement Plan is an arrangement where the company appoints a trust institution to both administer the Plan and manage the Fund. 

b. Agency
An Agency Retirement Plan is an arrangement where the company authorizes an Investment Manager for the management of the Fund. 

 The following steps shall be undertaken in setting up a Retirement Plan: 

Step 1. Drafting of the Retirement Plan Rules and Regulations
This step involves 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), and the amount of retirement benefits to be given. 

Step 2. Commissioning of an Actuary
This step involves the engagement of the services of an actuary in order to determine the estimated annual cost, normal cost, and past service liabilities which will arise from the creation of a Retirement Plan. The actuary conducts the study and prepares the valuation report based on data provided by the company which includes each employee’s age, gender, salary, and number of years in service, among others. 

Step 3. Appointment of a Retirement Fund Investment Manager or Retirement Plan Trustee
This step involves the engagement of an investment manager who shall be responsible for managing the contributions to the Retirement Fund or the appointment of a trustee who shall handle both the administration of the Retirement Plan and management of the contributions to the Retirement Fund. 

Step 4. Execution of the Investment Management Agreement or Trust Agreement
Depending on the type of Retirement Plan arrangement chosen, an Investment Management Agreement or a Trust Agreement shall be drafted for execution between the company and the investment manager/trustee. The agreement will contain the terms and conditions that will govern the administration and/or management of the Retirement Plan/Fund, including the powers and authorities granted to the investment manager/trustee. 

Step 5. Commencement of Contributions to the Retirement Fund
Upon execution of the agreement, the company shall begin making contributions to the Retirement Fund based on the annual cost indicated in the actuarial valuation report. 

Step 6. Securing a Tax Qualification Certification from the BIR
The Trusteed Retirement Plan shall be submitted to the BIR for approval and the issuance of the corresponding tax qualification certificate (i.e. BIR Ruling). The BIR ruling will enable 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. 

Setting up a Trusteed Retirement Plan usually incurs the following costs: 

a. Actuarial Valuation Fees for the study and preparation of the actuarial valuation report 
b. BIR Application Fees for the application of the Fund’s Tax Identification Number (TIN) and processing of the tax exemption qualification 

Once the Retirement Plan is set up, the following costs shall be incurred:

a. Retirement Fund Contributions which may be on a monthly, quarterly, or semi-annual basis depending on the company’s cash flows 
b. Trust Fees for the management of the Retirement Plan which shall be chargeable against the Retirement Fund 
c. Ledger Fees in case of Contributory/Defined Contribution Plan (Provident Plan) for the maintenance of individual ledgers for each employee where his contributions and earnings shall be recorded 
d. TIN Renewal Fee payable to the BIR on an annual basis 

The company must contribute to the Retirement Fund throughout its existence to be able to reap its benefits. 

While contributions to a trusteed Retirement Fund are charged as business expense, the employer may also view these expenses as early savings/investments for any future employee separation or retirement-related outlays. Moreover, the earnings that are accumulated by the Fund as well as the tax savings from contributions (as these are deductible from taxable income) effectively reduce the amount of contributions required from the company over time. 

Separation or retirement benefits can be upgraded. However, diminution of benefits is not allowed. In case the employer decides to give additional benefits to its employees, another actuarial valuation study must be conducted. 

Fund contributions may have to be adjusted to cover the new benefits package while the amended or revised plan rules and regulations shall be submitted to the BIR for reassessment of the continued tax qualification of the Retirement Plan.