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Tax treatment of the compensation payment to the pension insurance by the employer from a severance package

December 12, 2020 | 50,00 EUR | answered by Steuerberater Knut Christiansen

Dear tax expert,

I have a question regarding the following situation: An employee receives a severance payment as compensation for a job loss due to operational reasons. The employee did not receive any wages subject to social security contributions in the year in which the severance payment was made, only earnings replacement benefits. In addition to the severance payment, the accrued vacation entitlement is also settled as part of the termination of the employment relationship.

The employer offers to make a contribution to the pension fund for early retirement under § 187a SGB VI with a part of the severance payment. The total contribution paid by the employer to the pension fund is credited to the severance payment. Assuming that the total contribution paid by the employer to the pension fund is 20,000 euros, which is below the maximum amount certified by the pension fund for offsetting pension deductions, e.g. 35,000 euros.

1. Is it correct that 50% of the contribution (i.e. 10,000 euros) may be paid tax-free by the employer? Or does this apply to 50% of the maximum contribution certified by the pension fund (50% of 35,000 euros)?

2. How are the other 50% (also 10,000 euros) treated for the employee? Is it correct that this portion is treated tax-wise as if the employee were making the payment themselves to the pension fund, i.e. as deductions for special expenses in the income tax return?

Thank you for your response!

Steuerberater Knut Christiansen

Good day and thank you for using frag-einen.com!

I am happy to answer your question as part of an initial consultation. Please note that this forum cannot replace personal advice, but only allows for an initial tax assessment.

Regarding 1) It is generally correct that the employer can pay the top-up amount according to § 3 No. 28 EStG tax-free in the sense of § 187a SGB VI up to 50% of the contributions paid.

Regarding 2) The other 50% represent taxable income for the employee. Therefore, income tax would generally be due. However, the employee can claim this amount as a special deduction in their income tax return.

The tax treatment is also well explained here:
https://www.bundestag.de/resource/blob/665596/8c9b5978024b879a36436d0e42b20e0a/WD-4-121-19-pdf-data.pdf

I hope this answers your question, if not, please feel free to reach out again.

Best regards,
Knut Christiansen
Tax advisor