IN FOCUS
IN FOCUS 

PERA: WHAT'S IN IT FOR EMPLOYEES AND EMPLOYERS?

 

 

The Personal Equity and Retirement Account (PERA) Act of 2008 grants tax incentives to contributors, whether employed or unemployed. It does not mandate employers to contribute towards PERA on behalf of its employees. However, it allows employers to do so provided they comply with the mandatory SSS contribution and the retirement pay under the Labor Code.

 

Employers' contributions are deductible expense for corporate income tax purposes.

 

PERA, thus, provides the employer an alternative scheme to augment the retirement benefits of its employees. Note that the common schemes employed by employers for this purpose are: (1) simply increasing the benefits under the Defined Benefit (DB) program, and/or (2) adopting a supplementary Defined Contribution (DC) plan, commonly known as the Provident Fund.

 

Under a DB program, however, contributory (one where an employee contributes) schemes are not suitable and thus, defeats the common employer objective to encourage employees to save and be partly responsible for their sustenance after retirement.

 

A Contributory Provident Fund (CPF) scheme is a very good supplemental program but the administrative cost or the minimum initial funding required by trust fund managers makes it viable only for big companies.

 

As we see it, these problems may not be present under PERA. We also see that a company may adopt a policy that it will only contribute to an employee's PERA if the employee himself makes his own contribution, thus, mimicking a contributory provident fund.

 

Even for companies who can afford a Contributory Provident Fund, PERA could be worth considering. It is important though to take note of the following peculiarities:

 

1. Control

 

Contributions to PERA are effectively money given directly to employees. Employer has no more control over it. It is similar to being fully vested at day one. The employee also has control over investment decisions.

 

Under CPF, the employer is free to set its vesting schedule e.g. after 5 years of service, the employee gets only 25% of the employer contribution and earnings; and make the actual payout only upon separation. The employer usually makes the investment decision. This can either be taken positively or negatively (some employers would prefer to pass on the investment decision to its employees so they could not be blamed for losses while others prefer otherwise to ensure the funds are invested prudently).

 

2. Employer Cost

 

At the same contribution rate, PERA will be more expensive to the Employer as it will not benefit from forfeitures for separation prior to full vesting as it would under CPF.

 

3. Taxes

 

Below is a comparison of the tax incentives:

 

 

CPF

PERA

Employer Contribution

Deductible in Company's Gross Income

Deductible in Company's Gross Income

*Employee not subject to Income Tax

*Employee gets a tax credit of 5% of contribution not exceeding P 100,000 annually

Employee Contribution

No tax credits

5% of contribution not exceeding P 100,000 annually

Investment Earnings

Not taxable

Not taxable

Eligibility for tax-free payout / withdrawals

Age 50 and 10 years of service

Age 55 and 5 years of contribution

Tax for non-eligible withdrawals / payment

**Employer contribution and investment earnings, and employee investment earnings subject to income tax

**Withdrawals subject to return of tax incentives given

 

*We presume that employer contributions to PERA will be included as part of the employee compensation which is subject to income tax but with a 5% tax credit. On the other hand, an employer's contribution to CPF does not become part of the employee's income yet. Thus, we can say that PERA is favorable to low-income earners and CPF is favorable to high-income earners. 

 

**The effect of non-qualified withdrawal or benefit payment is the opposite. Under CPF, high income-earners pay higher tax.

 

4. Appeal to Employees

 

Obviously, PERA will appeal more to employees. Employer contributions are effectively benefits already paid to employees.