3. What are the requirements for tax-qualification?


For a plan to be accorded the tax incentives, it must first be approved by the Bureau of Internal Revenue (BIR). BIR requires submission of the following: 

  • Plan rules / document
  • Trust agreement / Insurance contract
  • Actuarial valuation report
  • Duly-filled BIR Form 17.60

The plan must be reasonable. The following are the requisites for a reasonable plan:

  • Written program. - It must be a definite written program setting forth all provisions essential for qualification;
  • Permanency. - It must be a permanent and continuing program unless sooner terminated by virtue of a valid business reason;
  • Coverage.

(1) Percentage basis:  It must cover at least 70% of all officials and employees. If the plan provides eligibility requirements and at least 70% of all officials and employees meet the eligibility requirements, at least 80% of those eligible must be covered. Under this basis, the following employees are excluded:

(a) Employees who have been employed less than minimum length of time stated in the plan;

(b) Employees who work 20 hours a week or less; and

(c) Seasonal employees who work 5 months a year or less.

(2) Classification basis: If the employer does not wish to cover greater portion of his employees, he may set up a plan under a classification set-up prescribed by him and limit coverage to employees in a certain classification, over a prescribed age, employed for a stated number of years, etc., provided that the coverage of the plan must not discriminate in favor of officers, shareholders, supervisors, or highly compensated employees. A classification shall not be considered discriminatory merely because it is limited to salaried or clerical employees. Neither shall a plan be considered discriminatory merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, and the employees' length of service.

  • Contribution. - The employer, or officials and employees, or both, shall contribute to a trust fund for the purpose of distributing to the officials and employees or their beneficiaries, the corpus and income of the fund accumulated by the trust in accordance with the plan. 
  • Impossibility of diversion. - The corpus or income of the trust fund must at no time be used for, or diverted to, any purpose other than for the exclusive benefit of the said officials and employees.
  • Non-discriminatory. - There must be no discrimination in contributions or benefits in favor of officials and employees who are officers, shareholders, supervisors, or highly compensated.
  • Non-forfeitures. - It must provide for non-forfeitable rights, that is upon the termination of the plan or upon the complete discontinuance of contributions under the plan, the rights of each official or employee to benefits accrued to the date of such termination or discontinuance, to the extent then funded, or the rights of each employee to the amounts credited to his account at such time are non-forfeitable.
  • Forfeitures. - The plan must expressly provide that forfeitures arising from severance of employment, death or for any other reason, must not be applied to increase the benefits any employee would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. The amounts so forfeited must be used as soon as possible to reduce the employer's contributions under the plan.
  • Trust. - The retirement fund shall be administered by a trust.