State pensions and mandatory schemes
Do employers and/or employees make pension contributions to the government in your jurisdiction? If so, briefly outline the existing state pension system.
Statutory pension insurance is based on the concept of a ‘contract between the generations’, under which contributors finance the pensions of existing pensioners on a pay-as-you-go basis. Persons subject to statutory pension insurance are primarily dependent employees.
Contributions to statutory pension insurance are borne by the employer and employee together and are calculated on the basis of employee remuneration. An employee’s remuneration that exceeds the applicable contribution ceiling will not be considered when calculating contributions to statutory pension insurance. The contribution ceiling amounts are:
- €6,350 per month for former West Germany; and
- €5,700 per month for former East Germany.
Pension contributions amount to 18.7% of the employee’s remuneration and are limited by the contribution ceiling, of which employers and employees each bear 9.35%. The size of contributions and the contribution ceiling are revised annually. The figures above reflect the legal situation in 2017.
At present, the statutory pension age is 67. However, there are also lower age thresholds for persons who are disabled or who have been insured for a long time.
Can employers deduct any state pension contributions from their taxable income?
Employers can deduct state pension contributions for tax purposes. These contributions constitute part of salary expenses.
Are there any proposals to reform or amend the existing system?
At present, the pension entitlements in former East Germany are below those in former West Germany. Pension entitlements will be incrementally adjusted from July 2018. By July 2024, pension entitlements in former East Germany will be equal to those in former West Germany. This will also affect the applicable contribution ceiling, which will be adjusted in seven steps.
Since the statutory pension system is vulnerable to the negative demographic developments in Germany, there are continuous discussions on how to address this problem (eg, increasing the statutory pension age).
Other mandatory schemes
Are employers required to arrange or contribute to supplementary pension schemes for employees? If so, briefly outline how the scheme is enforced and regulated.
In general, employers are not required to arrange or contribute to supplementary pension schemes. However, there is one exemption: pursuant to Section 1(a) of the Act for the Improvement of Company Pension Plans, employees may claim that up to 4% of the applicable statutory pension insurance contribution ceiling will be used as deferred compensation. An employer may decide whether the deferred compensation will be paid to a pension or staff pension fund or an employee may request that the employer take out direct insurance. The employee must use at least 1/160 of the reference figure pursuant to Section 18(1) of the Social Security Code IV for deferred compensation in each calendar year. For 2017, the reference figure pursuant to Section 18(1) is €35,700 per year. However, an employee cannot bring forward his or her claim if there is already a company pension scheme in place which is based on deferred compensation.
Occupational pension schemes
Types of scheme
What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?
Different types of pension schemes exist, including:
- direct insurance;
- a pension fund;
- a staff pension fund; or
- a benevolent fund.
An employer may directly and personally grant a pension or involve an external pension provider.
While all of above pension schemes are used, most employers prefer to offer direct insurance through an external pension provider.
Is there a statutory framework governing the establishment and operation of occupational pension plans?
The basic statutory framework for occupational pension plans is the Act for the Improvement of Company Pension Plans, which provides for employee protection rights that secure employee benefits from a pension commitment. In order to achieve this aim, the act restricts various arrangements between employers and employees that would affect the pension commitment.
What are the general rules and requirements regarding the vesting of benefits?
The vesting of benefits depends on a pension plan’s contractual regulations and the Act for the Improvement of Company Pension Plans’ mandatory statutory rules. Contractually, it is possible to agree on an immediate vesting (non-forfeiture) of a pension commitment. According to the act, pension commitments vest by mandatory rule (Section 1(b), Sub-section 1 of the act) if the pension commitment exists for at least five years and the employee is at least 25 years old. From 2018, pension commitments will be vested if they exist for at least three years and the employee is at least 21 years old. An important consequence of the vesting of pension claims according to the statutory law is that such claims are protected against the employer’s insolvency by the Mutual Pension Security Association.
What are the general rules and requirements regarding the funding of plan liabilities?
The funding of plan liabilities depends on the type of pension scheme that has been established. If an employer grants a direct pension commitment, it is usually funded by making provisions for liabilities. Such direct pension commitments are often secured by liability insurance. Pension schemes that are managed by external pension providers are usually funded by the employer’s ongoing contributions to the pension provider. In any case, the employer remains liable, at least in the second degree, for employee pension claims that have been vested.
What are the tax consequences for employers and participants of occupational pension schemes?
Employer contributions and provisions usually constitute operating expenditure and are therefore deducted up to certain thresholds from taxable income. Employees usually have to pay income tax on their pension when the pension payments are not made earlier.
Is there any requirement to hold plan assets in trust or similar vehicles?
The legal body responsible for company pension schemes differs depending on the respective vehicle chosen. A pension pool is a legally independent life assurance company which can be managed as a German stock corporation, a European company (societas Europaea) or a mutual insurance association. The same applies for direct insurance vehicles, which are typically based on a life assurance policy. Pension funds, as pension institutions with legal capacity, can likewise be managed only in the form of a German stock corporation, a societas Europaea or a mutual insurance association. A benevolent fund is generally managed in the form of a registered association. In the case of a direct commitment, the employer formulates provisions in its balance sheet.
Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?
Depending on the vehicle used, special regulatory provisions apply in relation to capital investment. Direct insurance, pension funds and the pension pool are all subject to government insurance supervision by the Federal Financial Supervisory Authority. In relation to capital investment, the Insurance Supervision Act’s investment rules apply. In this respect, pension funds are less fettered than pension pools. Benevolent funds, on the other hand, are not bound by investment regulations under any special law and are, as a basic principle, free in their choice of investment. However, the nature of investment, even in the case of benevolent funds, cannot lead to a situation where the fund, through the activities associated with the asset management, pursues a purpose which is not stipulated under its articles of association. In the case of a direct commitment, an employer formulates provisions in its balance sheet.
Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?
If a company is insolvent, the Mutual Pension Protection Association assumes the payment of pensions where the pension vehicle in question provides protection against insolvency. Benevolent and pension funds must provide protection against insolvency. Benefits granted through a staff pension fund or under a direct insurance policy are not, as a basic principle, obliged to provide such protection. However, they are subject to supervision by the Federal Financial Supervisory Authority, which constantly monitors the business operations of insurers in order to prevent cases of mismanagement or quickly recognise such activity. In cases of mismanagement, the supervisory authority will intervene in order to restore an orderly situation as quickly as possible. The funds for benefits provided by the Mutual Pension Protection Association are raised through contributions from companies that have chosen protected retirement benefit policies.
Are employees’ pension rights protected in the event of a business transfer?
If a business is sold or transferred to a new proprietor by other means, the existing employment relationships, together with all rights and obligations, pass to the acquiring party, pursuant to Section 613a(1)(1) of the Civil Code. Irrespective of the vehicle chosen for the company's pension scheme, employees are thereby fully protected. In all cases, employees are treated as if there has been no change of employer. Together with the employment relationships which are transferred, the acquiring party must also assume the existing company’s pension scheme. Neither a compensatory payment nor a waiver may be agreed with an employee. The same applies for any agreement under which the company pension scheme remains with and is continued by the transferor. The acquiring party must maintain the pension commitment together with all rights and obligations. This means that the period of service with the previous and new employers are treated as a single period for the purpose of determining:
- the amount of benefits earned;
- the relevant qualifying period; and
- the vesting of rights by law.
If the former employer has given the employee a direct pension commitment, the new employer must provide the benefits under this commitment in the full amount. If a company pension scheme at the business making the transfer was implemented through a benevolent fund, the pension does not pass to the acquiring party. However, it may be agreed that the new employer takes over as the sole business responsible or joins as a responsible body. Any direct insurance policy concluded by the former employer must be transferred to the new employer through assignment of insured party status. The new employer continues the insurance policy as the insured party and pays the agreed insurance premiums in future. The same applies in the case of a commitment to a staff pension fund.
Deferred compensation agreements
Deferred compensation plans
Do any special tax rules apply to these types of arrangement?
General rules apply. Employees are subject to taxation when cash is paid or benefits in kind are given to employees.
Do these types of arrangement raise any special securities law issues?
Where a company pension scheme is managed as a conversion of a portion of employee salaries, no special capital market provisions apply. However, in the case of a salary conversion, employee entitlements are vested immediately. Further, in the case of direct insurance or a pension or staff pension fund, profit shares may be used only to improve the benefits and any employee leaving the company must be granted the right to continue the insurance or pension plan with his or her own contributions. The right of the employer to pledge, assign or lend against pension funds is also excluded. Further, in the case of direct insurance, employees are granted an irrevocable pre-emptive right on the commencement of the salary conversion.
What are the most common types of share option plan in your jurisdiction? Please outline the rules relating to each scheme.
In general, employee share plans (and other employee participation plans) are uncommon in Germany as there are no substantial tax benefits. Therefore, the total number of employee share plan participants in Germany is relatively small compared with other European countries.
However, employee share plans are rather common in public limited companies (eg, AGs (corporations limited by share ownerships), KGaAs (partnerships limited by shares) and European companies (societas Europaea)), in particular those belonging to an international group (especially with a parent company in the Unites States). Employee share plans are less common in small and medium-sized companies, except start-up companies. This often corresponds with the legal form of such companies, such as companies with limited liability. Such companies cannot grant real shares or options; they must operate with other plans which grant virtual shares. (For further details please see the explanation below.)
There are no different types of share option plans. However, the following rules must be observed when granting the option to acquire real shares:
- Employers should conduct a discretionary granting of share options while observing the general rules of equal treatment.
- Shares to be granted must either be purchased on the market (Section 71(1) 8 of the Stock Corporation Act) or created through a contingent capital increase (Section 192(2) 3 of the Stock Corporation Act).
- The maximum value of shares must amount to 10% of the company’s nominal share capital.
- The volume of options for board members must be in reasonable proportion to the total remuneration.
- The exercise price must be significantly lower than the real stock price.
- Vesting and waiting periods must be standard. Vesting periods usually vary between three and five years. The minimum waiting period is four years (Section 193(2) 4 and Section 71(1) 8 of the Stock Corporation Act). However, from an employment perspective, vesting or waiting periods, or a combination of both, should not exceed five years.
- Share option plans sometimes stipulate additional holding periods that prohibit a prior sale of acquired shares. There are no statutory time limits; however, a period of between five and 10 years should be possible.
What are the tax considerations for share option plans?
In a share option plan, the taxation of employee benefits can take place when granting or executing the option and transferring shares.
Share acquisition and purchase plans
What are the most common types of share acquisition and purchase plan in your jurisdiction? Please outline the rules relating to each scheme.
There are two types of share acquisition or purchase plan:
- The company offers employees the right to purchase shares, normally at a discounted share price below fair market value.
- The company offers employees the right to purchase shares at fair market value and will grant additional shares at no cost. These additional shares are often ‘restricted’, meaning that they cannot be transferred until particular time or performance-based conditions are met.
The maximum value of shares amounts to 10% of the company’s nominal share capital (with respect to vesting, waiting and holding periods, please refer to the above explanation of share option plans.) However, vesting periods are generally extraordinary in share purchase plans unless in the form of a restriction (as described above).
What are the tax considerations for share acquisition and purchase plans?
Any discount granted when acquiring shares is subject to taxation for employees. A tax exemption of up to €360 per year is possible on an employee share purchase plan if the plan is open to all employees and further requirements are met.
Phantom (ie, cash-settled) share plans
What are the most common types of phantom share plan used in your jurisdiction? Please outline the rules relating to each scheme.
The most common types are phantom share plans and share appreciation rights.
However, neither are common in Germany. In both plans, the employee does not receive real shares, but instead participates in the development of the listed share price.
In the case of phantom stocks, the contractual agreement provides for a treatment which is the economic equivalent of the share acquisition plan. Share appreciation rights are the economic equivalent to share option plans.
Comparable to share option plans, phantom share plans and share appreciation rights normally provide for time and performance-based vesting conditions. (For further details please see the above explanation of share option plans).
What are the tax considerations for phantom share plans?
Employees have to pay tax on phantom share plans.
Are companies required to consult with employee unions or representative bodies before launching an employee share plan?
Provided that the company issuing an employee share plan has a works council, it has various consultation and codetermination rights regarding the implementation of the above types of employee share plan under Section 87(1)(10) of the Works Constitution Act. In this case, the employer must enter into an agreement with the works council setting out the principles of the distribution of shares and the technical and formal aspects of the particular plan. If a share plan concerns executive employees, the spokesperson committee – which is to some extent the equivalent to the works council for such employees – must be informed and consulted.
Further information and consultation rights may exist in view of payment details and possible technical monitoring (Sections 87(1)(4) and (6) of the Works Constitution Act).
However, the number of shares included in a plan and eligible employees are generally not subject to information rights or the works council’s consultation rights. Information and consultation rights do not exist if the share plan applies only to members of the management board.
Further, the works council is entitled to access all necessary documents and request competent employees to provide information.
If a share plan is implemented by a foreign parent company and the German employer will neither grant the shares nor guarantee this in connection with the employment, no consultation or codetermination with the German works council is required. The works council can require only the aforesaid general information with regard to the share plan.
Provision of insurance
What is the health insurance provision framework in your jurisdiction? For example, is it provided by the government, through private insurers or through self-funded arrangements provided by employers?
Germany has statutory health and nursing care insurance. Statutory health insurance schemes are the carriers of statutory health insurance. With certain restrictions, insured persons are free to choose from available statutory health insurance schemes. Persons subject to compulsory statutory health insurance are primarily dependent employees or retirees. Contributions to statutory health and nursing care insurance are borne by employers and employees. Contributions are calculated on the basis of the employee's remuneration. When calculating contributions to statutory health and nursing care insurance, the part of the employee's remuneration exceeding the applicable contribution ceiling will not be considered. The contribution ceiling for health and nursing care insurance is €4,350 per month. The contribution to statutory health insurance is 15.5%, of which the employer pays 7.3% and the employee 8.2%. Depending on the regulations of the relevant statutory health insurance scheme, the employee might have to bear an additional contribution of approximately 0.9 %. Contributions to statutory nursing care insurance amount to 2.55%, of which the employer and the employee both bear 1.275%. If an employee is childless and over 23 years old, he or she will have to bear an additional contribution of 0.25%. The size of contributions and the contribution ceiling are revised annually. The figures above reflect the legal situation in 2017.
If an employee's annual gross remuneration exceeds the income threshold for compulsory health insurance, he or she may take out private health insurance. In this case, up to 50% of contributions to the cost of private health and nursing care insurance will be borne by the employer. The income threshold for 2017 is €57,600 gross per year.
Do any special laws mandate minimum coverage levels that must be provided by employers?
No, employers are obliged only to contribute to statutory health and nursing care insurance or – if applicable – private health and nursing care insurance.
Can employers provide different levels of health benefit coverage to different employees within the organisation?
Since employees either are subject to statutory health and nursing care insurance or have taken out private health and nursing care insurance, it is uncommon in Germany for employers to provide additional health coverage to their employees. Under German labour law, if an employer decides to provide such additional health coverage, the equality principle must be observed (ie, employees can be treated differently only if there is a valid reason to do so).
Are employers obliged to continue providing health insurance coverage after an employee’s termination of employment?
No, there is no such obligation.