Republic Act No. 7641, amending Article 287 of the Labor Code of the Philippines (Retirement Pay Law 1992), specifically provides for the mandated payment of retirement benefits.
As further explained by the Department of Labor and Employment (1996), the minimum retirement pay formula that must be afforded to any qualified retiring employee shall be “one-half 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 service incentive leave” unless the parties provide for broader inclusions. Evidently, the law expanded the concept of “one-half month salary” from the usual one-month salary divided by two. In reckoning the length of service, the period of employment with the same employer before the effectivity date of the law on January 7, 1993 should be included. Coverage includes all employees in the private sector, regardless of their position, designation or status and irrespective of the method by which their wages are paid. However, the law does not cover employees of retail, service and agricultural establishments or operations regularly employing of not more than ten (10) employees.
In the absence of a retirement plan or other applicable agreement providing for retirement benefits of employees in an establishment, an employee may retire upon reaching the age of 60 years or more provided that he has served for at least five (5) years in said establishment. The compulsory retirement age of an employee under the Mandatory Retirement is sixty five (65) years. The minimum length of service in an establishment is five (5) years and shall include authorized absences and vacations, regular holidays and mandatory fulfillment of a military or civic duty.
In case of retirement under a collective bargaining agreement or other applicable employment contract or retirement plan, the employee shall be entitled to such benefits as he may have earned under such agreements or contracts; provided that in case the benefits are less than that provided by law, the employer shall pay the difference between the amount due the employee and that provided under the collective or individual agreement or retirement plan.
Where both the employer and the employee contribute to a retirement fund in accordance with an individual or collective bargaining agreement or other applicable employment contract, the employer’s total contribution thereto shall not be less than the total retirement benefits to which the employee would have been entitled had there been no such retirement fund. In case the employer’s contribution is less than the retirement benefits provided under the law, the employer shall pay the deficiency.
A retirement pay shall not constitute compensation subject to withholding tax if the retirement benefits received by employees of private firms under a reasonable private benefit plan comply with the following requirements:
(i) The benefit plan must be approved by the Bureau of Internal Revenue;
(ii) The retiring employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and
(iii) The retiring employee shall not have previously availed of the privilege (of withholding tax exemption) under the retirement benefit plan of the same or another employer.
Republic Act No. 4917 (An Act Providing That Retirement Benefits Of Employees Of Private Firms Shall Not Be Subject To Attachment, Levy, Execution, Or Any Tax Whatsoever, 1967) extends twin preferential treatments to retirement benefits accruing from a reasonable retirement plan, namely: (1) exemption from imposition of all taxes; and (2) not subject to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever. In order to enjoy said treatments, at the time of his retirement, the retiring employee shall have been employed by the same employer for at least ten (10) years and is not less than fifty (50) years of age. In implementing the said law, Felizmenio Jr. (2008, p. 2) reported that the Bureau of Internal Revenue prescribes the following requisites to tag a retirement benefit plan as reasonable:
a) There must be a definite written program setting forth all provisions essential for qualifications;
b) It must be permanent and continuing program unless sooner terminated by virtue of a valid business reason;
c) It must cover at least 70% of all officials and employees;
d) The employer, officials and employees, or both, shall contribute to a trust fund for the purpose of distributing the corpus and income of the fund in accordance with the plan;
e) The corpus or income of the trust fund must not be diverted and shall be used exclusively for the benefit of the said officials or employees;
f) The contributions or benefits in the plan shall be non-discriminatory to favor officials or employees who are officers, shareholders, supervisors, or highly compensated;
g) It must provide for non-forfeitable rights to benefits accrued and to the amounts credited to an account of an official and employee at the time of discontinuance or termination of plan.
h) Any forfeited amounts must not be applied to increase the benefits any employee would otherwise receive under the plan but must be used as soon as possible to reduce the employer’s contributions under the plan.
Under BIR Revenue Regulation No. 1-83 (1982 s. 1), private companies must submit to the Bureau of Internal Revenue a copy of the written retirement plan program plus a statement of actuarial assumption or valuation duly certified by an independent consulting actuary who must be a Fellow of the Actuarial Society of the Philippines, before availing of the tax privileges afforded to pension plans.
Further, the Bureau of Internal Revenue (BIR) required that the retirement fund shall be administered by a trust. There are no specific limitations with respect to investments of the fund provided they are permitted by the trust agreement. In fact, the Section 60B of the Tax Reform Act (1997) specifically states that income derived from employee’s trust which forms part of a pension plan is exempted from income tax. However, the Bureau of Internal Revenue (BIR Regulations No. 01-68 1968, s. 5) mandated that the exemption of the trust income may be denied if the trust:
(a) Lends any part of its income or corpus without adequate security and a reasonable rate of interest;
(b) Pays any compensation in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered;
(c) Makes any part of its services available on a preferential basis;
(d) Makes any substantial purchase of securities or any other property for more than adequate consideration in money or money’s worth;
(e) Sells any substantial part of its securities or other property, for less than an adequate consideration in money or money’s worth; and
(f) Engages in any other transaction which results in a substantial diversion of its income or corpus.
A legal opinion has been rendered by Bunag (2004) that if the retirement benefit to be received by a member of a private benefit plan established by the employer under R.A. No. 4917 and duly approved by the BIR is equal to or less than the minimum retirement benefit provided by R.A. No. 7641 on compulsory retirement, said benefits shall be exempt from income tax. However, if the employee receives from the BIR approved plan a retirement benefit in excess of the minimum retirement benefit provided by R.A. No. 7641 on compulsory retirement, he must satisfy the requirements or conditions of R.A. No. 4917, which means that he must be at least fifty (50) years old and must have served the company for at least ten (10) years in order that his retirement benefits may be tax exempt. Finally, retirement benefits received by employees not from a BIR approved retirement plan shall be governed by R.A. No. 7641. The opinion stemmed up from a case where several employees of GCHS since January 1, 1998 have been compulsorily retired after twenty (20) years of service, pursuant to Section 1, Article X of the GCHS Retirement Plan. These retirees, however, have not reached aged fifty (50). By reason of the opinion rendered, the benefits received by the retirees who were compulsory retired are tax exempt.
The above opinion should be reconciled with the ruling of the Bureau of Internal Revenue (BIR Ruling No. 052-2000 ) which states:
“However, the Retirement Plan Rules and Regulations of a Company may provide that the normal retirement date or early/optional retirement date be more than what is required by the Tax Code. Consequently, in case of conflict between the Tax Code and the Retirement Plan Rules and Regulations, it is the latter that should prevail.”
“Such being the case, while Sec. 3 of the Retirement Plan Rules and Regulations provides that upon the attainment of at least age 55 or upon completion of twenty five (25) years of service the employee may be retired at the option of the company, the employee availing of the early/optional retirement must have rendered ten (10) years of service to the company or must be at least age fifty (50) years of age at the time of retirement, otherwise the retirement benefits to be paid to him shall be subject to income tax and consequently to withholding tax. In this particular case, although he is 51 years of age and has rendered 23 years of continuous service to the company, the retired employee is still not covered under the early/optional retirement for failure to comply with the conditions as provided in Sec. 3 of the said Plan i.e., attainment of at least age 55 or completion of twenty five (25) years of service. In fine, the retirement benefits to be paid to the said employee shall be subject to income tax and withholding tax prescribed under Section 57 (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98.”