Global Retirement Update

Transcription

1 Global Retirement Update December 2013 This Update summarizes recent legislative developments and trends related to retirement and financial management and highlights recently passed and pending legislation that may require employers to take action to comply with new rules or review existing plans. Action May Be Required China Employees receive tax relief for their participation in an Enterprise Annuity (EA) retirement plan, effective January 1, On December 6, 2013, three Chinese government agencies issued a joint statement indicating that Chinese workers are allowed to make tax-deferred contributions to an employer-sponsored supplemental retirement program (EA). The employer s total contribution is capped at 8.33% of prior year s total salary. For specific employees, such as long-term employees, the contribution may be higher as long as the plan has been approved by the labor authority. Employee contributions are tax exempt up to 4% of prior year s total salary, capped at three times the City Average Wage. Earnings are tax exempt. Effectively, EAs are subject to an EET tax model (exempt contributions, exempt investment income and capital gains, and taxed benefits). Employers that have not yet established an EA plan may wish to include it in their total rewards strategy. Prior to the issuance of the joint statement, the national government did not address tax incentives for EAs. State Administration Circular 694 specifies that employees do not receive a tax deduction for their contributions to an EA. Employer contributions are taxable to the employee at progressive income tax rates ranging from 5% to 45%. Employer contributions are not aggregated with normal salary and wage income for the purposes of calculating the employee s income tax and have been generally taxed at a lower rate than employment income. United States Multinational employers need to determine whether their non-u.s. retirement and other long-term benefits programs will be subject to Foreign Account Tax Compliance Act (FATCA) registration and reporting obligations. U.S. tax withholding for nonexempt programs is scheduled to begin July 1, 2014 and the current deadline for registration with the Internal Revenue Service (IRS) (to avoid the U.S. tax withholding) is April 25, The U.S. has entered into intergovernmental agreements (IGAs) with countries under which certain benefit programs in each country are exempt from FATCA reporting. Until recently, IGAs were in place with nine countries: Denmark, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland, and the United Kingdom. During the last month, three additional IGAs were finalized with the Cayman Islands, Costa Rica, and France. The IGAs are a key piece of guidance for how FATCA is to be implemented in each country. In other jurisdictions, the FATCA regulations are generally the only guidance. As noted above, multinational employers with non-u.s. retirement and other long-term benefits programs now have about four months in which to decide. Copyright 2013 Aon plc 1

2 and implement their FATCA compliance strategy for these benefits programs to avoid the potential U.S. withholding taxes. Recent Developments Americas The U.S. Internal Revenue Service (IRS) released temporary nondiscrimination relief for certain closed defined benefit pension (DB) plans. These are plans that provide ongoing accruals but have been amended to limit those accruals to some or all of the employees who were participating in the plan on a specified date. Such plans may increasingly have trouble satisfying nondiscrimination testing over time as the proportion of plan participants who are highly compensated employees (HCEs) increases. This may happen for a number of reasons, such as higher rates of turnover among nonhighly compensated employees (NHCEs) than HCEs and the tendency of NHCEs participating in the closed DB plan to become HCEs as they continue in their employment. Notice allows certain employers that sponsor both a closed DB plan and a defined contribution (DC) retirement plan to demonstrate that the aggregated plans comply with the nondiscrimination requirements of Code Section 401(a)(4) on the basis of equivalent benefits, even if the aggregated plans do not satisfy the current conditions for testing on that basis. In the notice, the IRS also requests comments on a variety of possible permanent changes to Section 401(a)(4) nondiscrimination rules. The comments are due by February 28, The U.S. IRS published the 2013 Cumulative List of Changes in Plan Qualification Requirements. The 2013 Cumulative List is to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2014 and ending January 31, According to the IRS, plans using this 2013 Cumulative List will primarily be single employer individually designed DC plans and single employer individually designed DB plans that are in Cycle D and multi-employer plans as described in Section 414(f). Generally, an individually designed plan is in Cycle D if the last digit of the employer identification number of the plan sponsor is four or nine. The list of changes in Section 4 of the Notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. The general deadline for timely adoption of an interim or discretionary amendment can be found in Section 5.05 of Revenue Procedure The U.S. IRS issued guidance (Notice ) on in-plan rollovers to designated Roth accounts. The guidance, which is in Question & Answer form, covers in-plan Roth rollovers of otherwise nondistributable amounts and also provides rules that are applicable to all in-plan Roth rollovers. The American Taxpayer Relief Act of 2012 expanded in-plan Roth rollovers to include rollovers of otherwise nondistributable amounts, effective for in-plan Roth rollovers made after December 31, Previously, in-plan Roth rollovers could only be made for otherwise distributable amounts, such as amounts eligible for distribution due to severance from employment or attainment of age 59 and 6 months. Thus, beginning in 2013, a Section 401(k) plan can allow an individual to roll over an amount from a non-roth, regular (pretax) account into a designated Roth account in the same plan at a time when the individual is not eligible for a distribution. Similar rules apply to Section 403(b) and governmental Section 457(b) plans. With respect to rollovers of otherwise Copyright 2013 Aon plc 2

3 nondistributable amounts, Notice addresses prior guidance, eligible rollover amounts, withholding, and plan amendments. With respect to all in-plan Roth rollovers, the notice addresses the types of contributions eligible for rollovers, a plan s discontinuance of such rollovers, the requirement of five taxable years of participation, net unrealized appreciation, top-heavy plans, and excess amounts. The U.S. IRS released final regulations on the reduction or suspension of safe harbor contributions. In November 2013, the IRS released final regulations that include amendments to regulations relating to certain cash or deferred arrangements under Section 401(k) and matching contributions and employee contributions under Section 401(m). The regulations provide guidance on permitted midyear reductions or suspensions of safe harbor nonelective contributions in certain circumstances for amendments adopted after May 18, These regulations also revise the requirements for permitted midyear reductions or suspensions of safe harbor matching contributions for plan years beginning on or after January 1, The regulations affect administrators of, employers maintaining, participants in, and beneficiaries of certain defined contribution plans that satisfy the nondiscrimination tests of Section 401(k) and Section 401(m) using one of the design-based safe harbors. The regulations are effective as of November 15, The U.S. Pension Benefit Guaranty Corporation (PBGC) published a final rule that updates the early retirement probability table. Specifically, the rule amends the PBGC s regulation on allocation of assets in single-employer plans by substituting a new table for determining expected retirement ages for participants in pension plans undergoing distress or involuntary termination with valuation dates falling in This table is needed in order to compute the value of early retirement benefits and, thus, the total value of benefits under a plan. The final rule becomes effective on January 1, The Financial Services Commission of Ontario (FSCO) (Canada) has replaced policy I with policy MJ When and How to Change the Province of Registration for a Multi-jurisdictional Pension Plan.. It references the distinction between the 1968 Memorandum of Reciprocal Agreement, which only requires a change of major authority when the regulator is satisfied that the change in plurality is permanent, and the more recent Agreement Respecting Multi-jurisdictional Pension Plans (currently only Ontario and Quebec are signatories), that requires a change of major authority under three specific situations. In addition, while the policy indicates that FSCO has a process in place to review annual information returns (AIRs) for all multi-jurisdictional pension plans it has on file, it also indicates that plan administrators should have a process in place to review their plans AIRs so that they can identify any shift in plan membership. However, the policy goes on to state Once the plan administrator becomes aware that a change of registration is or may be necessary, the plan administrator should advise FSCO in writing about this. FSCO also has replaced policy I with policy MJ Documents at the Financial Services Commission of Ontario for Plans Registered in Other Jurisdictions. In Quebec (Canada), the Regulation providing new relief measures for the funding of solvency deficiencies of pension plans in the private sector was published at the end of November The purpose of the Regulation is to offer, for a two-year period, relief measures for the funding of deficiencies of defined benefit plans in the private sector. The measures follow and are comparable in several respects to those provided for under the Regulation providing temporary relief measures for the funding of solvency deficiencies (chapter R-15.1, r. 3.1). The Regulation comes into force on December 31, Copyright 2013 Aon plc 3

4 Changes to the Quebec (Canada) Pension Plan will be effective January 1, The following changes will be made: Increase in benefits by 0.9%; Increase in maximum pensionable earnings from CAD 51,100 to CAD 52,500; Change in retirement pension eligibility for individuals age 60 to age 65; Change to the actuarial adjustment factor; and Change to the retroactive retirement pension for individuals age 65 and over. The Canada Revenue Agency has announced the 2014 contribution limits for Money Purchase Registered Retirement Pension Plans (RRPP), Registered Retirement Savings Plans (RRSP), and Deferred Profit Sharing Plans (DPSP). Effective January 1, 2014, the RRPP contribution limit will increase from CAD 24,270 to CAD 24,930. The RRSP contribution limit will increase from CAD 23,830 to CAD 24,270. The DPSP limit will increase from CAD 12,135 to CAD 12,485. Asia Under pending legislation in Australia, account-based pensions may be subject to deeming provisions as of January Deeming provisions are part of the income test procedure and apply to all means-tested social security pensions and all income-support plans and allowances. Deeming means that a predetermined rate of interest is applied to all financial assets, irrespective of the actual interest rates earned. Deeming provisions apply to all interest-bearing financial assets including bank accounts, shares, managed funds, friendly society and insurance bonds, term deposits, and debentures. Under the provisions, an individual s pension entitlement will be determined according to the deemed rate rather than the actual rate. The Minerals Resource Rent Tax Repeal and Other Measures Bill 2013, which includes provisions to repeal the low-income superannuation contribution (LISC) and defer the superannuation guarantee, was passed by Australia s House of Representatives. The Bill would rephase the staged increase in the superannuation guarantee (SG) charge percentage to 12% and repeal the LISC as of July 1, The SG charge percentage would remain at 9.25% for the two years starting on July 1, 2014 and July 1, 2015, and would increase to 9.5% for the year starting on July 1, It would then gradually increase by half a percentage point each year until it reaches 12% for the years starting on or after July 1, The LISC is a payment for an individual who has concessional contributions (such as SG payments and salary sacrifice amounts) and an annual adjusted taxable income up to AUD 37,000. The maximum amount payable is AUD 500. The contribution is designed to return the 15% tax paid on concessional contributions by an individual s superannuation fund. Trustees and administrators of defined benefit superannuation plans in Australia should prepare to comply with the Tax Administration Act 1953 (Meaning of End Benefit) Instrument The purpose of this instrument is to ensure that family law superannuation payments are not end benefits under Section in Schedule 1 Copyright 2013 Aon plc 4

5 to the Taxation Administration Act 1953 and, therefore, do not trigger an individual s liability to pay Division 293 tax that has been deferred to a debt account. In Japan, the Osaka District Court ruled that gender-based age limits on pension benefits are unconstitutional. The case involved a widower who was denied a survivor s pension due to his age; the plan had no age-based requirement for widows. Employers may wish to review their pension and workers compensation plans in light of the ruling. South Korea s Ministry of Labor and Employment has ruled that incentive bonuses may be paid into an employee s DC account. Bonuses paid into a DC account would be considered an employer contribution to the plan and, therefore, not subject to income tax or social contributions. Employees may choose whether to have the entire bonus paid into the account or only part of it. Employers must amend their plan rules and file these rules with the government prior to implementing this change. Europe The European Court of Justice (ECJ) recently ruled that same-sex couples in civil partnerships who live in European Union (EU) Member States where they cannot marry are entitled to the same benefits as married couples. In the case under consideration, a French employee of Credit Agricole who entered a civil partnership was denied leave days and a bonus granted to employees who married. The ECJ ruled that the bank s policy constituted direct discrimination on the basis of sexual orientation. Civil partnerships must be given the same status as marriages in the workplace. The European Union s Committee of Permanent Representatives agreed on a compromise for the pension portability directive. Under the directive, employees moving to another EU Member State would have full rights to supplementary pensions established in conformity with national legislation and practice of a Member State. The vesting period would be three years. Once passed, Member States would have four years to transpose the directive into national law. It is not known when the European Parliament will vote on the latest draft directive. Employers in the United Kingdom should note changes to directors compensation disclosure requirements. Following the release of final regulations which revise directors disclosure requirements from October 1, 2013, the Financial Conduct Authority has now announced that for U.K. listed companies, the requirement to provide additional disclosures will be removed for years ending on or after September 30, In the United Kingdom, Her Majesty s Revenue and Customs (HMRC) has released final details on Individual Protection. Before the lifetime allowance is reduced from GBP 1.5 million to GBP 1.25 million on April 6, 2014, individuals with benefits exceeding the new threshold will need to consider applying for transitional protection. Following the consultation in the summer on the proposed Individual Protection (IP14), HMRC has released its response to the comments received. It also has issued draft legislation and guidance on the new provisions for comment. IP14 will set an individual s lifetime allowance as equal to his or her benefit amount on April 5, 2014 (capped at GBP 1.5 million). The U.K. Pension Protection Fund (PPF) issued its final determination for the levy. There are no substantive changes from the draft Determination that was published in September 2013: the risk-based scaling factor will remain at 0.73 and the plan-based levy multiplier at %. The risk-based levy cap remains at Copyright 2013 Aon plc 5

6 0.75% of a plan s s179 liabilities. In particular, the PPF has decided not to make any changes in anticipation of the new Dun & Bradstreet (D&B) Failure Score methodology due to be implemented from January In the United Kingdom, Chancellor George Osborne delivered his 2013 Autumn Statement on December 5, 2013, which included several provisions related to pensions. The main items relevant to pensions are: A core principle that people should expect to spend, on average, up to one-third of their adult life in receipt of State Pension, and future increases to State Pension Age (SPA) will reflect this principle; A facility to boost State Pension, for existing pensioners and those reaching SPA before April 2016, by paying voluntary National Insurance contributions; and Other general taxation changes including further details on the transferable married couples tax allowance and a reduction in employer National Insurance Contributions for individuals under age 21. The Department of Work and Pensions subsequently published a background note on the government s core principle underpinning future SPA increases. The government's expectation is that the methodology would provide for SPA to complete any increase in the year in which adult life spent in receipt of State Pension would have reached 33.3%. The review would seek to give at least 10 years notice of any change. The U.K. Pensions Regulator published a consultation on DB schemes. As promised earlier in the year, the Pensions Regulator has opened a consultation on its funding code of practice, strategy, and approach. The draft documents under consultation replace documents that have been in force since The drafts reflect the change in the Regulator s approach, the nature of risks for DB schemes, and the proposed new regulatory objective on sustainable growth. The code of practice sets out practical guidance for trustees and employers on how to comply with the scheme funding requirements set out in legislation, and is focused on principles and outcomes. The funding policy document sets out how the Regulator intends to assess risk and define acceptable outcomes on an annual basis; how it intends to identify the schemes to investigate; how it will intervene; and how it will measure its impact. The Regulatory strategy sets out the overall strategic objectives and the approach to achieving these objectives, including the main areas of risk focus. The consultation runs to February 7, The strategy and policy are expected to be implemented at the same time as the code is laid, in May The new code is expected to be in force by July 2014 and will apply to schemes undertaking valuations from that time. However with immediate effect, trustees and employers submitting valuations are urged to bear in mind the messages in the revised code. The Irish government recently introduced legislation on the wind up or restructuring of DB plans. The Pensions Amendment Bill 2013 addresses the following: Copyright 2013 Aon plc 6

7 Double insolvency (both the employer and the pension plan are insolvent): The funds in the plan would be divided to ensure that all beneficiaries (pensioners, current employees, and former employees) received 50% of their benefits. Existing DB pensions in payment would be protected up to EUR 12,000. If the plan did not have sufficient funds to meet this amount, Pension Levy funds would be used to provide the shortfall. Single insolvency (employer is solvent but plan is winding up): Pensioners in receipt of pension under EUR 12,000 would receive first priority to ensure they were not affected. Pensions between EUR 12,000 and EUR 60,000 would be reduced by 10% of the total pension amount. The overall reduction would be limited to a maximum of 20% of the total pension amount when the pension was over EUR 60,000. The government would not contribute in this situation. Restructuring of pension plan: Trustees would be given the option to restructure a plan to ensure its viability. Benefits would be 100% protected up to EUR 12,000 per year or full pension if lower. Trustees would have the option to reduce higher pension benefits (up to 10% of the total pension in payment if the benefit were between EUR 12,000 and EUR 60,000 and up to 20% if the total exceeded EUR 60,000). The Pensions Board also is expected to introduce tighter regulations including: refusal to accept funding proposals from plans with less than 50% funding; imposition of other obligations to ensure significantly underfunded plans achieve a base level of funding in the short term; and withdrawal of flexibility options for plans that fail to meet recovery plan measures when the level of funding falls below 50%. The parliament is expected to vote on the Bill by the end of Under the Irish government s 2014 budget, the standard fund threshold of an individual s pension fund would be reduced from EUR 2.3 million to EUR 2 million as of January 1, The amount exceeding the threshold is taxable. If an individual s pension fund exceeded EUR 2 million on January 1, 2014, he or she would be able to apply to Inland Revenue for a threshold of EUR 2.3 million. Individuals who had previously applied to Inland Revenue for a threshold would retain that threshold. France s 2014 Social Security Finance Law includes measures that affect the taxation of employee benefits. Both houses of parliament passed the law in early December 2013; it is now subject to review by the Constitutional Council. Life insurance products that include traditional savings and unit-linked elements will be subject to a 15.5% social tax; previously, these contracts were exempt from social taxes. In related news, employers and employees old age pension contributions will increase by 0.15% (each) in The increased employer contribution will be offset by a 0.15% decrease in the family allowance contribution. Additional details will be forthcoming in the January 2014 Update. The Dutch Ministry of Social Affairs has opened a public consultation on improving pension communications. According to officials at the Ministry, current legislation must be amended to accommodate different means of communication and provide more individualized detail on pension benefits, including risks and future purchasing power. It also is proposed that communications include information on the impact of individuals choices, such as early, deferred, or part-time retirement and value transfers, and life events, such as divorce, on benefits. Copyright 2013 Aon plc 7

8 Employers and employees in the Netherlands should note that contribution rates for certain National Insurance and Employed Persons Insurance programs are changing. The employee contribution rate to the general sickness national insurance program (AWBZ) will increase from 12.15% to 12.65%. The employer contribution for unemployment (WW) will increase from 1.70% to 2.15%. Employers also will see an increase in their long-term disability contribution (WIA) from 4.65% to 4.95%. The changes will be effective January 1, The retirement age in Finland may increase by two years beginning in Currently, the retirement age for a national pension is age 65; it is age 63 to age 68 for an earnings-related pension. The actual retirement age, according to the government, is approximately age 61. Reforms would tie the retirement age to changes in life expectancy. A draft bill is expected to be introduced to parliament in autumn 2015, with reforms effective in The Polish Council of Ministers revised the pension reform bill prior to sending it to Congress. Open pension funds (OFEs) would be required to invest at least 75% of their assets in shares; they would be forbidden from investing in Treasury bonds and other instruments guaranteed by the Treasury. OFEs would be required to transfer their government bond holdings to the social security system (ZUS). As of April 1, 2014, individuals enrolled in OFEs would have four months to decide to continue to divide their contributions between ZUS and an OFE or have their contributions deposited in ZUS. They would be permitted to change providers in 2016 and every four months thereafter. Pension funds would be allowed to advertise; however, advertisements would be prohibited three months before and during the time individuals were making their provider selection. Both houses of parliament passed the bill without amendment. The president must still sign the bill into law. Russia s Duma passed and the Federation Council approved a law amending second-pillar pensions. The amended law s major provision affects contributions to the second pillar. Individuals born in or after 1967 will be permitted to participate in the funded second-pillar system or opt out and have their 6% contribution deposited in the first-pillar insurance system. If an employee does not select a second-pillar fund administrator, his or her contributions will default to the first pillar. Middle East The Israeli government has delayed the implementation of choice of broker legislation from July 1, 2014 to January 1, Employees in Israel will have the right to choose their own preferred insurance broker instead of working with the broker selected by their employer. The new requirement applies to retirement benefits, severance pay funding, and professional training fund arrangements. Employers should expect that their benefit administration processes will become more complex, and costs will increase as premiums and funding payments will be made to a wider range of insurance companies, pension funds, and investment companies. The goal of the new requirement is to increase competition among providers so that employees receive better and lower cost services. In the United Arab Emirates (UAE), the Federal National Council approved early retirement provisions for women. Women would be permitted to retire at any age with 15 years service. Currently, nationals are permitted to retire at age 60 with 15 years service. The government also is considering measures to encourage men who reach pensionable age to continue working. Specifically, the cap on combined pension and employment income would increase. Currently, this cap is AED 10,000. It is not known if or when action will be taken. Copyright 2013 Aon plc 8

9 International The International Accounting Standards Board (IASB) published a narrow scope amendment to IAS 19 Employee Benefits, Defined Benefit Plans: Employee Contributions (Amendments to IAS 19). The amendment applies to contributions from employees or third parties. The goal is to simplify the accounting for contributions that are independent of the number of years of employee service (e.g., employee contributions that are based on a fixed percentage of pay). The amendment is effective July 1, 2014; earlier application is permitted. * * * * For more information on the topic and countries in this newsletter, please refer to the Aon Hewitt Country Profiles eguide. You can learn more about the Country Profiles eguide here. Copyright 2013 Aon plc 9

10 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit Copyright 2013 Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Copyright 2013 Aon plc 10