Sunday, October 14, 2012

Importance of setting up an employee retirement fund

As per Republic Act No. 7641, Employers are required to pay retirement benefits to their employees,  in the private sector, regardless of their position, designation or status and irrespective of the method by which their wages are paid, except to those listed under the exemptions.

"... an employee upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.

Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of service incentive leaves.

Given this, Employers should plan on how to establish and fund the retirement plan to enjoy the following benefits:
  • Company can enjoy tax-free investments of the retirement fund.
  • Employer will have no issues on cash flow even if there are big cash outlay when an employee retires.
  • Benefits to be received by Employee (in excess of the minimum required by law) will not be taxable.
Retirement Plan: 401(K) 2012
One option on how Employer pays for their Employees' retirement benefits is to pay as Employees retire. This option may hurt the business cash flow. Another option is for Employer to set up a retirement fund to cover for future Employees' retirement benefits.

There are a lot of ways on setting up the retirement fund and one way is through insurance. Personally, I think this is the cheapest and better option. Employer may insure the life of its employees, pay the premium, and use the insurance plan’s cash proceeds to pay the retirement benefits mandated under RA 7641. To learn more on how to set up your company retirement plan through this method, contact me for more details.