Company Pension Plans: What Business Owners Need to Know

Under a company pension plan, the employer commits to providing pension benefits to the employee. A company pension plan can, for example, provide coverage for retirement, disability, and/or death. A good company pension plan is very beneficial for employees and can therefore also be used to improve employee retention. As an entrepreneur and employer, you should therefore address this topic early on. In some cases, you as an employer are required to provide additional benefits, such as deferred compensation. However, voluntary benefits and offerings can also be beneficial. In a fierce competition for skilled workers, you can set yourself apart with appropriate additional benefits. Similarly, this strengthens the bond with key existing employees, who can be retained in the company longer through the corporate pension plan. In this article, as tax advisors in Düsseldorf,
we will explore corporate pension plans. The focus here is on providing a general overview for entrepreneurs and employers.

What types of employer-funded pension plans are available?

First, we must consider the options available for a company pension plan. Here, we can distinguish between two different models. As an entrepreneur, you should decide as early as possible which of the available options to use. The following two basic concepts should be distinguished:

• As an employer, you can choose to offer a standalone plan for supplemental benefits. This so-called standalone basic plan is granted to selected employees. In this case, the benefits are independent of whether the respective employee opts for deferred compensation.
• Alternatively, as an employer, you can also decide to make the pension benefits contingent on whether or not the employee participates in deferred compensation. Deferred compensation is an attractive form of corporate pension plan for employees. Employees have a wide range of options for saving on taxes through retirement planning. You can find more on this topic in our blog post on deferred compensation. As mentioned earlier, you can make the company pension plan contingent on deferred compensation. Under this model, the existing deferred compensation plan is simply expanded. Employees who do not participate in deferred compensation are therefore also excluded from the additional benefits. It should be noted that this may in some cases also result in mandatory employer contributions. It is therefore advisable to consult with a qualified tax advisor.

Which employees are eligible to benefit from a company pension plan?

Once you have decided on the form in which the additional benefits will be offered, you must determine which group of people is eligible to receive these benefits. In principle, you can make the company pension plan available to every employee, but you are not required to do so. Often, special additional benefits are used, for example, to retain executives or particularly important specialists within the company. To this end, as an employer, you can designate specific groups of employees for the pension plan. This approach is particularly popular and common in large companies with many employees. However, it is very important that your regulations do not violate the principle of equal treatment under labor law. No arbitrary or irrelevant distinctions may be made. Permissible distinctions include, for example, differences between specific management levels, variations in qualifications, or between field staff and other employees. It would be impermissible, however, to exclude part-time employees without a valid reason. Disadvantaging a specific employee due to personal differences and reducing additional benefits is therefore not in compliance with the law! Similarly, not every employee is entitled to the same benefits.

What types of benefits can be differentiated?

Company-provided benefits do not refer solely to an improved pension. Under the Company Pension Act, coverage for disability can be provided in addition to retirement coverage. Furthermore, coverage can extend not only to the employee but also to their surviving dependents. Disability benefits typically cover occupational disability. This results in a total of three benefit objectives (retirement benefits, disability benefits, and death benefits). These three types of benefits can, of course, be provided cumulatively or separately. Accordingly, it is possible to offer only a company pension plan or to provide coverage solely for occupational disability. This approach also allows for the prioritization of specific employee groups.

How do you find the right benefit structure?

Once the above-mentioned fundamentals have been clarified, employers must address implementation. To do this, a suitable benefit structure must be established. A distinction is made between defined benefit and defined contribution plans. The selected benefit structure primarily determines the following two aspects of the supplemental benefits:

• Amount of the promised pension benefit
• The employer’s liability for shortfalls

Below, we will take a closer look at the two benefit structures mentioned above. As an employer, you must decide for yourself which option is best suited—or, ideally, discuss it with a qualified tax advisor.

1. Defined Benefit Plan

In a defined benefit plan, the promised pension benefit is either a fixed amount or an amount determined based on a specific calculation basis. As an employer, you are responsible for the promised pension benefit. This benefit structure is being used less and less due to a variety of factors. However, the defined benefit plan remains relevant for disability and survivor benefits. In the event of retirement, a specific level of pension can be guaranteed.

2. Defined-Contribution Systems

In defined contribution plans, the promised benefit is the result of converting contributions. These plans are based on actuarial principles. A distinction should be made between defined contribution plans and defined contribution plans with a minimum benefit.

Professional advice for business owners and employers

We hope that the points mentioned have helped you gain a general overview. The exact structure of the company pension plan should be planned as carefully as possible to avoid mistakes and thus unintended liability in the future. As an entrepreneur and employer, you don’t have to deal with the details of a company pension plan. Instead, it makes sense to consult a qualified tax advisor for planning and implementation.

As tax advisors in Düsseldorf and Oberhausen, we are the perfect point of contact for all tax-related questions. Our team of qualified tax and business experts with many years of experience will help you solve your problems. Why not simply schedule a consultation so you can see our expertise for yourself? Just contact us to receive expert advice in Düsseldorf and Oberhausen. We look forward to your visit!