Frequently Asked Questions

Answers to the questions HR, finance, and accounting teams ask us most about retirement plans, actuarial valuations, and BIR registration in the Philippines.

Frequently asked questions

How is the retirement benefit defined under RA 7641?

Under RA 7641 the retirement benefit is one-half month salary per year of credited service, where one-half month means 15 days plus one-twelfth of the 13th month pay plus the cash equivalent of up to 5 days of service incentive leave, or about 22.5 days of pay per year of credited service.

Are companies with fewer than 10 employees exempt from registering a retirement plan with the BIR?

Companies with fewer than 10 employees are not required to set up a retirement plan, but we still recommend registering one with the BIR, since headcount may grow. Companies with 10 or more employees should register their retirement plan with the BIR to secure tax exemption.

What are the advantages of registering a retirement plan with the BIR?

Four main benefits: contributions to the retirement trust fund are tax-deductible; the fund's earnings are tax-exempt; retirement benefits received by the employee are tax-exempt provided they are at least 50 years old with at least 10 years of service (RA 4917); and it builds funds systematically to meet future obligations. These are available only if the plan is registered with the BIR.

What is the Annual Normal Cost (ANC)?

The Annual Normal Cost is the recommended yearly contribution covering current and future service.

What is the Past Service Liability (PSL)?

The Past Service Liability is the company's liability for service rendered by employees from their hire date to the valuation date. It may be paid in full or amortised over 3 years, 5 years, or another schedule, provided the period does not exceed the remaining working life of the employee group.

What are the tax implications of contributions to the retirement trust fund?

One hundred percent of the Annual Normal Cost contribution may be treated as a deductible expense for the year. Only 10% of the Past Service Liability contribution may be deducted in the same year.

Can a retirement plan offer benefits lower than the RA 7641 minimum?

Yes, and the BIR can still approve such a plan. However, on an employee's retirement the company must still pay the minimum benefit set by RA 7641. Since payouts from the trust fund follow the BIR-approved plan, any shortfall against the statutory minimum is shouldered by the company.

How are newly hired employees treated in the valuation?

New hires have no past service, so they do not affect the Past Service Liability. For the Annual Normal Cost, we recommend using the funding rate (ANC as a percentage of compensation) rather than an absolute amount, so salary increases, turnover, and new hires are accounted for.

What are the advantages and disadvantages of a multi-employer retirement plan?

A multi-employer plan lets employees transfer between participating companies without breaking their tenure, so prior years of service still count at retirement. The limitation is that benefits must be the same across all participating companies; if one wants to upgrade benefits that others cannot afford, it would need to separate into its own single-employer plan.

Should the valuation date align with the start of the accounting period?

We recommend setting the valuation date to the first day of your balance sheet date, so the tax deductibility of the Annual Normal Cost applies for the full year. If the valuation date falls mid-year, the deductible current service contribution is pro-rated for the remaining months.