Tax Treatment of Payouts by Employee Pension Plans clarified

THE PORTION OF payouts by employee pension plans representing a return of an employee’s personal contributions to the fund is not taxable.

This was clarified by the BIR under Revenue Memorandum Circular No.39-2014 issued on May 12, 2014.

As a general rule, Section 60(A) of the National Internal Revenue Code (NIRC) subjects the income of any kind of property held in trust to Income Tax. By way of exception, Section 60(B) of the same Code exempts from Income Tax an employee’s trust which forms part of a pension, stock bonus or profit sharing plan of an employer for the benefit of some or all of his employees, subject to certain conditions.

However, as an exception to the said exception, Section 60(B) subjects to Income Tax, in the year in which so distributed, any amount actually distributed to any employee or distributee in excess of the amount he/she contributed in the employees’ trust.

Based on the said NIRC provisions, the entire amount of benefits paid by a pension, stock bonus or profit-sharing plan of an employer for the benefit of employees are taxable on the part of employees in the year so distributed. Said tax treatment, however, does not apply to payouts representing a return of an employee’s personal contributions to the fund and to retirement benefits exempt under Section 32(B)(6)(a) of the NIRC.

Source:  BIR Monitor Volume 16 No. 6 

Tax Code Reference:

RA 8424, CHAPTER X - ESTATES AND TRUSTS,  

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including:

(1) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.