Everything you wanted to know about pension plans but had no one to ask
Find the answers to the questions you've always wanted to ask.
By MOSHE EGEL-TALShekel money bills(photo credit: REUTERS)
As of January 1, 2008, an expanded regulation order regarding a mandatory pension plan for all employees in Israel went into effect. An expanded regulation order is secondary to a labor law, and once signed by the labor minister becomes binding for all employers in Israel and is enforced by the labor courts the same as if it were a law. This is a way to add mandatory items to employees’ rights that is much quicker than the lengthy process needed to pass or amend a law in the Knesset. Examples of other expanded regulation orders are travel expenses reimbursement and convalescence pay (dmei havra’a).What are the criteria for a pension?The criteria for eligibility are as follows:1. Age – male from age 21 and female from age 20.2. If an employee has an existing active pension plan, he or she is eligible for continuation of the plan after three months of tenure, retroactive to their start date.3. If the employee does not have an existing active pension plan, he is eligible after six months of tenure (not retroactively).What is a pension plan?A pension plan is a long-term savings plan intended for retirement. The plan has several components: the employee’s contribution and the employer’s contribution, which are savings, and the employer’s contribution toward severance pay. The percentages of each contribution are defined specifically in the expanded regulation order.A pension plan can be in a pension plan company or an insurance company, in which case it is called “managers’ insurance” (bituah menahalim).There are several differences between a pension plan and a manager’s insurance. Most notably, managers’ insurance can be only via an insurance agent agency, while a pension plan can be either via an agent or directly from the pension plan provider company. A pension plan has a built-in clause for loss of work ability insurance at 75% of one’s insured salary. This is mandatory by law. The managers’ insurance policies have the loss of work ability insurance as a separate component that the employer needs to pay in addition to the other components (see below).Choice of pension plan and insurance agentAn employer is required to allow each employee to choose his preferred pension plan provider/company as well as the insurance agent. An in-house insurance agent or company that the employer has chosen cannot be mandatory for all employees.However, there are several “default pension plans” from which the employer is allowed to choose one. This plan allows an automatic sign-up by the employer for employees without the need for a health declaration or an employee’s signature. This is meant to be used for any employee who is eligible for pension but who failed to supply the employer’s payroll department with the details of his existing or chosen pension plan, thus enabling the employer to eliminate exposure to the regulation for noncompliance, as well as possible lawsuits.Signing up for a pension plan is relatively simple and can be done online on the pension plan’s website. The Finance Ministry has set up a website dedicated to information on all the pension funds in Israel: pensyanet.cma.gov.ilOn this site one can compare revenue and management fees, as they differ from one plan to another. While the management fees are an important factor, it is not the only criterion that should be taken into account when choosing a plan. It is recommended to seek professional advice.Employees should take note that it is their right to choose the pension plan fund/company/insurance agent always exists, and the employee can change his plan at any given point and time, but it is the employee’s responsibility to send the employer’s payroll department the needed information so it can update the payroll program accordingly.Percentages of contributionsEmployeeThe employee’s contribution is 6%. This is deducted from the gross pay – usually from the base pay and occasionally from additional components, such as sales commissions and global overtime. The employee can raise his contribution to 7% via notification to the employer. This can be very significant with regard to the monthly pension amount one receives upon retirement.EmployerThe employer’s contribution is 6.5% toward savings.There is an additional contribution toward severance pay at 6% minimum. If the employer contributes 8.33%, it can be in place of severance pay. If the employer contributes 6% and the employee is terminated and eligible for severance pay, the employer may need to do an additional payout of 2.33%.If the employee’s pension is in managers’ insurance, the loss of work ability insurance is also paid by the employer.General Information• Employees can transfer their pension plans from one employer to the next when changing jobs. There is no limit to the number of times this can be done.• If the place of employment has a pension package that offers better terms than the above, these better terms would take precedence.• If one is employed in several places simultaneously, each employer needs to make contributions toward pension individually. This can be in the same plan.• When leaving a place of employment, for any reason – whether terminated or resigning one’s position, the employer is required to issue a “letter of release” addressed to the pension plan/insurance company, releasing all the monies accrued in the employee’s name to the employee. This needs to be accompanied by tax form 161 and received by the employee within 15 days of the date of end of employment.• While occasionally severance pay can be withdrawn from the pension plan at the end of employment, this is highly not recommended, as an employee who does so will lose on several accounts:1. One will receive 40% less in monthly pension payments at retirement.2. One will cut off the continuity of tenure with all employers, resulting in a much lower tax-free amount at retirement.3. One may be taxed on said withdrawal.• If an employee’s previous employer contributed 8.33% toward severance pay, a new employer must continue the same percentage and cannot contribute only 6%.• In most cases, since 2008, section 14 of the severance pay law is applicable, resulting in no additional payout by the employer (provided the employer has deposited 8.33% towards severance pay into the pension plan) as well as ensuring the release of severance pay to the employee even upon resignation. Disclaimer: The information above is for general knowledge and does not replace professional advice, which should be sought on an individual basis. The above is not legal advice, nor is it a recommendation to act or not. It is meant only as a service to the public. The author is not a licensed pension plan adviser or insurance agent.The writer is a certified senior payroll professional with over 25 years experience in all facets of Israeli payroll and has extensive working knowledge on Israeli labor laws and employee rights. He can be reached via his digital business card: get-marketing.com/Israpay or site: www.israpay.com
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