Institutional plan for employees with pension funds

In this context, pension funds have managed a new product within their portfolio called institutional plan. Below, we will detail the aspects that must be taken into account with respect to this figure: 

What is the institutional plan?

These are contributory savings plans through which companies grant previously defined benefits to their employees. Likewise, they also allow participants to make contributions to achieve the goals contemplated in the plan. 

Who participates?

• Sponsor: It can be a company, society, unions, associations, associations and cooperatives that promote the creation of the plan and who define the objective, the amounts of savings and the conditions or requirements for the enjoyment of contributions.
• Participant: Individuals who are employees of the sponsor, for whom the plan was created. They are those who may make voluntary contributions to the plan. They may also be members or contractors of the sponsor.

How does it work?

The Sponsor makes contributions to the plan on behalf of each participant. These contributions are subject to the fulfillment of the conditions established by the Sponsor, which are known to the Participants from the moment they join the plan, who must also comply with them to obtain the right to these savings.

This process is called Consolidation, which implies for the participant the constitution of an income and an asset in his/her equity.

Important points to consider:

• The expense recorded by the institutional plans is paid directly by the company to the pension fund. This expense is considered deductible from the company's income and will be paid by the fund. 
• In accordance with article 27 of the E.T., only until the income is realized, i.e., the employee's institutional plan is consolidated, it will be considered as income of the employee for his income tax return. It is important that the employee reviews with his tax advisor the correct way to declare this income in his income tax return.
• If the employee complies with the conditions of the institutional plan, which are: (i) Remain in the account for at least 10 years; (ii) If withdrawn before 10 years, the resources must be invested in the purchase of a home, or in the payment of mortgage loans or mortgage financing installments. They shall not form part of the basis for applying withholding at source and shall be considered exempt income, up to a sum added to the value of the contributions to the Savings Accounts for the Promotion of Construction (AFC) referred to in article 126-4 of this Statute, not exceeding thirty percent (30%) of the labor or tax income for the year and up to a maximum amount of three thousand eight hundred (3,800) UVT per year. If the employee does not comply with the established conditions, he/she loses the benefits of the plan, so the withholding or tax reported would be the same as reporting it via payroll as a bonus.
• These contributions, when reported directly to the fund, will not be the basis for the employee's income in the company's payroll nor will they be reported in the electronic payroll. It will be the obligation of the fund to declare this income when it is realized and to issue a certificate of income and withholdings to the employee.
• We consider that this income will not constitute the basis for social security, since it will not be the employee's head but the funds. If at the initial time social security was paid associated with this income, a discrepancy would be generated with the UGPP. 

Regulations:

• Tax Statute - Article 126-1. Deduction of contributions to retirement and disability pension funds and severance funds.
• Tax Statute - Article 27. Realization of income for those not required to keep accounting records.