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State pensions and mandatory schemes

Contributions

Do employers and/or employees make pension contributions to the government in your jurisdiction? If so, briefly outline the existing state pension system.

Employers must register under the Mexican social security system, which includes a three-way administrative structure:

  • the Mexican Social Security Institute (IMSS), which provides full government medical coverage, including out-patient, maternity, disability and injury benefits to all registered employees, as well as daycare services for working mothers;
  • the National Workers' Housing Fund Institute, which provides government housing and credit opportunities for acquiring property; and
  • the Retirement Savings System and retirement funds administrators (AFOREs), which provide retirement and pension plans.

Social security services are financed through fees or quotas, that are funded by employees and employers via withholding – which is a primary obligation of all employers when disbursing salaries. Other than the obligation to register all employees with the IMSS, social security fees are essential to compliance and workplace stability, as they replace employees’ compensation, 401(k) and retirement coverage (ie, all other types of insurance and benefit), while entitling them to health, maternity, injury and disability benefits. The IMSS also provides wages during medical treatments and approved absences. 

This trade-off (a single payment) should be considered in light of the fact that a single legal social security administrative system exists to provide housing and retirement plans, as well as free medical clinics, hospitals, childcare and eligible services to employees and their families. The IMSS also pays for a percentage of an employee’s salary in the event of a job-related accident, illness or temporary or permanent disability, and grants assistance to beneficiaries in case of work-related accidents or death.

Can employers deduct any state pension contributions from their taxable income?

Yes. Employer state pension contributions – including social security, housing, retirement and all other aspects covered by the IMSS – are tax deductible.

Are there any proposals to reform or amend the existing system?

 Yes. A major reform bill was passed and approved on January 26 2018. It revised the entire retirement system’s financial provisions and made the investment process more efficient for all pension fund administrators (AFOREs), which are private financial institutions responsible for managing employee’s retirement accounts.

AFOREs are the foremost institutional investors in Mexico – in 2017 they invested Ps1.06 billion in productive activities. By broadening the spectrum of investment for AFOREs, they are expected to grow exponentially over the next decade and guarantee better returns for all beneficiaries and account holders.

The bill’s most relevant reforms included:

  • simplifying investment rules for AFOREs;
  • improving access to investment instruments;
  • encouraging investment in institutions that comply with environmental, social and corporate governance criteria and regulations;
  • mandating analysis of active risks relating to natural disasters; and
  • broadening investment access to New Zealand, Taiwan, Thailand, South Africa and Malaysia.

Another significant reform expected in 2018 is the transformation of the mandatory social security system for all businesses in the construction industry – the only industry requiring a bespoke system outside the standard social security registration and rules. The System of Affiliation of Workers in the Construction Industry system has been replaced by the Integral Service of Registry of Construction Works. The new system aims to make registration, compliance and overall functioning easier for all construction businesses in Mexico.

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.

No. Employers must register and comply only by withholding mandated social security benefits that are handled by and paid into one administrative system for retirement plans.

Occupational pension schemes

Types of scheme

What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?

By means of withholding, employers must pay:

  • social security fees to the Mexican Social Security Institute;
  • housing fees to the National Workers' Housing Fund Institute; and
  • retirement fees to the Retirement Savings System.

The retirement system is comprised of pension fund administrators (AFOREs), which are private financial institutions responsible for managing employee’s retirement accounts. In order to protect employee resources, administrators are regulated by the National Commission for the Retirement Savings System (CONSAR). Employees may select an AFORE that suits them – failure to do so within a year will result in the employee being assigned an AFORE that is generating high returns.

Pension fund administrators are responsible for investing employee resources in a retirement fund investment company (SIEFORE). The SIEFORE’s objective is to generate returns for each individual, thereby increasing the amount of his or her pension.

Statutory framework

Is there a statutory framework governing the establishment and operation of occupational pension plans?

Yes. The following sections of the Constitution establish the legal framework that governs the establishment and operation of social security:

  • Articles 123(A)(XII), 123(A)(XIV) and 123(A)(XXIX);
  • Articles 123(B)(XI), 123(B)(XIII), 123(B)(XIIIbis) and 123(B)(XIV);
  • Articles 28(5) and 28(VIII);
  • Article 115(IX); and
  • Article 4 (relating to health and housing rights). 

The social security system comprises three fundamental sectors:

  • the private sector, which governs all private employers under the Mexican Social Security Institute (IMSS);
  • the public sector, which governs all government employees under the Public Social Security Institute; and
  • individuals that use IMSS facilities.

What are the general rules and requirements regarding the vesting of benefits?

All employees enrolled in the social security system will be entitled to a pension, but must meet certain requirements. The Mexican pension system has evolved and is working under two different systems at present:

  • one that governs all employees registered before or in 1973; and
  • the other which came into effect in 1997 and governs employees registered thereafter.

For employees retiring under the 1973 system, retirement insurance must be returned in full on receipt of the respective pension, as it is not considered in the calculation of the pension.

The following is a comparison of the two current pension systems:

Widower, disability and death pension

 

1973 system

1997 system

Wait time

150 weeks registered as beneficiary

150 weeks registered as beneficiary

Calculation

90% of the pension

90% of the pension

Who pays?

IMSS

Insurance company

 

Old age retirement pension

 

1973 system

1997 system

Wait time

Determined on salary and seniority.

1,250 weeks registered as beneficiary

Calculation

Determined on salary and seniority

Monthly payment according to the individual account balance

Who pays?

IMSS

IMSS, AFORE and/or insurance company

 

Early retirement pension

 

1973 system

1997 system

Wait time

N/A

1,250 weeks registered as beneficiary

Calculation

N/A

With the balance of the individual account, the employee should receive a survival insurance with a life pension of over 30% of the minimum wage

Who pays?

N/A

Insurance company

 

What are the general rules and requirements regarding the funding of plan liabilities?

Employees have individual accounts which are funded by their employers through withholding. Each account is managed by an AFORE, which must:

  • manage funds;
  • invest funds in a SIEFORE; and
  • maximise returns for beneficiaries.

These returns guarantee liabilities, expenses and any other fees incurred by each pension fund administrator.

Under the Law for the Retirement Pension Plan, AFOREs and SIEFOREs which fail to comply with the legal requirements must use their own assets to fund any resulting charges, notwithstanding the civil or criminal liabilities they must face.

What are the tax consequences for employers and participants of occupational pension schemes?

According to Article 93(IV) of the Income Tax Law, this type of income is exempt up to a daily amount of Ps1,209 (as of 2018).

Is there any requirement to hold plan assets in trust or similar vehicles?

No. The only way to participate in the pension system is through AFOREs and SIEFOREs, which are regulated by CONSAR.

Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?

Yes. AFOREs are in charge of investing employee resources in an investment company specialising in retirement funds (a SIEFORE). SIEFOREs aim to maximise returns for employees and increase employee pensions. The investment horizons of each SIEFORE differ according to the age of the employees, and the new provisions set out in the recently approved bill to reform the retirement system.

Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?

Employers do not hold pension funds – these are held by AFOREs and invested in SIEFOREs. However, the government is reviewing this matter through different agencies.

If an employer declares insolvency, all pending wages, labour benefits and severances will be handled by the labour authorities. However, all social security coverage, benefits and plans will be handled by the IMSS and AFOREs in accordance with the payments made by the employer before insolvency.

Are employees’ pension rights protected in the event of a business transfer?

Yes. Employee pension plans are protected in the event of a business transfer. The new employer will be liable for any and all omissions in withholding and paying forward social security, housing and retirement funds.

Deferred compensation agreements

Deferred compensation plans

Do any special tax rules apply to these types of arrangement?

Yes. Deferred compensation plans have different arrangements because they do not fall under mandatory minimum rights set out in the Constitution. If an employer wishes to grant a private deferred compensation plan, it will be regulated by income tax, sales tax and labour laws.

Do these types of arrangement raise any special securities law issues?

Not relating to government security. However, they should be taxed and regulated according to income tax law and labour law. 

Equity-based incentives

Share options

What are the most common types of share option plan in your jurisdiction? Please outline the rules relating to each scheme.

The impact of share option plans is not easily determined, especially in the existing business environment where career plans change frequently. However, share option plans can help companies achieve objectives and fulfil strategies.

Further, in Mexico these plans became relevant in the mid-1990s following the signing of the North American Free Trade Agreement. However, it was not until 2005 that income tax law recognised share granting as personal income.

Shares are considered taxable income under the Income Tax Law 2005. However, the incorporation of transitional rules and the lack of modifications to Articles 6, 113 and 180 of this law have distorted the determination of cash flow and taxable income.

As companies residing in Mexico must assist the tax authorities with supervising the fulfilment of their employees’ tax requirements, the obligation to report share acquisitions was added to Article 118 of the Income Tax Law.

Labour and employment laws make no mention of stock options, share plans or any incentives thereafter. Therefore, when granting such benefits, the risk of including these amounts as an integral part of the salaries must be calculated in case of labour claims.

What are the tax considerations for share option plans?

In order to comply with these provisions, Mexican companies that are involved with these plans or indirectly associated with them through the participation of their employees are advised to retain details of the following:

  • personnel inventories that include, among other things:
    • the names of employees participating in the plan;
    • the start and end dates of the ripening or vesting period;
    • the number of shares that the employee could acquire;
    • the number of shares exercised; and
    • the profit derived from the exercise of shares;
  • copies of inter-company agreements, through which it was agreed that Mexican employees could participate in said plan;
  • notes of charges or invoices for which a portion or the total amount of the benefit received by the employees is charged; and
  • calculation details of both the taxable amount and the total amount of the benefit.

Such records allow companies to fully comply with the fiscal obligations established in Article 118(8) of the Income Tax Law and adequately manage their plans.

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.

Stock options are granted subject to the exercise of stock options to achieve a weighted share price for the same maturity period of the said options. This reduces the volatility of the value of a company's shares and encourages employees to maintain productivity levels that achieve the weighted value of the share.

Units of restricted stock, which may represent treasury shares, may be granted free of charge to employees after a certain period. The price of treasury shares is equal to that of the company’s other shares. Therefore, if the value of the shares diminishes, the total obtainable profit reduces by a proportionate amount – a situation that employees would not allow to happen.

If the possibility of employees receiving shares, despite the decrease in share value, is not a viable option for the company’s shareholders, predetermined dates for delivering shares should be set in order to maintain the interest of employees on which the value of the stock depends.

What are the tax considerations for share acquisition and purchase plans?

Shares are considered taxable income under the Income Tax Law 2005. However, the incorporation of transitional rules and the lack of modifications to Articles 6, 113 and 180 of this law have distorted the determination of cash flow and taxable income. Further, Article 118 obliges companies residing in Mexico to report all employee share acquisitions.

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.

Phantom stock options are:

  • a means of attracting and retaining talented employees;
  • a complement to wages;
  • independent of their beneficiary’s position; and
  • virtual actions of the grantor company (ie, without the economic and political rights inherent to shares in which the company's share capital is divided).

The lack of specific legal regulation for phantom stock options offers considerable flexibility when establishing the rules under which they must be governed.

 A phantom stock option contract chiefly determines:

  • the beneficiary (normally an employee with an existing employment relationship at the time of the grant);
  • the consolidation period (ie, vesting period);
  • the purchase price (which the beneficiary need not pay at the time of the grant and may be reduced in the course of a liquidity event);
  • the definition of different assumptions of liquidity events (mainly assumptions relating to company transfers, but also (as a result of regulation flexibility) exceptions in case dividends are distributed by the granting company); and
  • the cases in which the beneficiaries may lose granted phantom stocks.

The main difference between stock options and phantom stock options is that the former grants beneficiaries the status of shareholders of the granting company. As such, and accounting for the dilutive effect of liquidity events, phantom stock option plans should be approved by the general meeting of partners (or in the framework of a partnership agreement duly signed by all of them) and detailed by the administrative body that will be in charge of determining the specific beneficiaries of the same or the revision of the concession price of the same within the general lines approved by the partners.

What are the tax considerations for phantom share plans?

Phantom stock options are not taxed during concession, as their value is merely the expected difference between the execution and acquisition prices. Beneficiaries receive this amount, which is considered monetary income for tax purposes. It is subject to the personal income tax applicable at that time and companies must make the corresponding deductions from beneficiaries’ salaries.

Consultation

Are companies required to consult with employee unions or representative bodies before launching an employee share plan?

Employee share plans are typically granted only to directors or administrators who, under the Mexican federal labour law, are considered employees outside unions. Therefore, if these plans are unavailable to the general workforce, no consultation with representative bodies or unions is required.

Health insurance

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?

Under Mexican law, everything that employees are entitled to and everything that is binding for employers is handled by and paid into one government institution: the Mexican Social Security Institute (IMSS). 

All employers must register with the IMSS, which provides full government medical coverage, including out-patient, maternity, disability and injury benefits, to all registered employees, as well as retirement and pension plans and daycare services for working mothers. Social security services are financed through fees or quotas, which are funded by employees and employers via withholding – one of the primary obligations of all employers when disbursing salaries. Other than the obligation to register all employees with the IMSS, these social security fees are essential to compliance and workplace stability as they replace employees’ compensation, 401(k) and retirement coverage (ie, all other types of insurance and benefit), while entitling them to health, maternity, injury and disability benefits. The IMSS also provides wages during medical treatments and approved absences. 

This trade-off (a single payment) should be considered in light of the fact that a single legal social security administrative system exists to provide housing and retirement plans, as well as free medical clinics, hospitals, childcare and eligible services to employees and their families. The IMSS also pays for a percentage of an employee’s salary in the event of a job-related accident, illness or temporary or permanent disability, and grants assistance to beneficiaries in case of the work-related accidents or death.

Coverage levels

Do any special laws mandate minimum coverage levels that must be provided by employers?

Yes. Social security law establishes statutory minimum withholding amounts. All employers must register with the IMSS, which provides full government medical, out-patient, maternity, disability and injury benefits to all registered employees, as well as retirement and pension plans and daycare services for working mothers.

Can employers provide different levels of health benefit coverage to different employees within the organisation?

Yes. Employers may offer private insurance to their employees. Otherwise, employees will be covered only by the minimal employer withholding obligations under the IMSS.

Post-termination coverage

Are employers obliged to continue providing health insurance coverage after an employee’s termination of employment?

No. While specific procedures apply to maintain an active status at the IMSS after employment has been terminated, once the employment relationship is over, the contributions that the employer must withhold and pay towards social security also end.