DISCLAIMER: This article does not create an attorney-client relationship between the author and the reader.  The answer of the author on the issue is just an expression of his general opinion based on Philippine law and hence does not constitute legal advice.

This article is best appreciated when read in relation to my article, MINIMUM EARLY RETIREMENT PAY IN THE PRIVATE SECTOR. 

In a nutshell, early retirement is retirement other than at normal retirement age.  Normal retirement is retirement at 60 years old or more but not more than 65 years old or at other age specified by law.

Republic Act (RA) No. 7641 (or the New Retirement Law) provides that the minimum early retirement pay established under R.A. 4917 (or an Act providing for an attachment-free retirement benefits of private employees) is 22.50 days for every year of service, a fraction of at least six (6) months being considered as one whole year.  The 22.50 days minimum retirement pay of the employee is further explained in Clarissa E, Santo vs University of Cebu (GR No. 232522, August 28, 2019) and in Beltran v. AMA Computer College-Biñan (GR No. 223795, April 3, 2019). 

We now delve on the tax aspect of early retirement pay.

Unless tax-exempt by provision of law too plain to be mistaken, all compensation paid to the employee, whether in cash or in kind, is subject to withholding tax.  As such early retirement pay constitutes compensation subject to withholding tax, except when the private benefit plan of the private employer meets the following conditions laid down under Section 2.78.1(B)(1)(a) of Revenue Regulations 02-98 in relation to Section 32(B)(6) of the National Internal Revenue Code (NIRC), to wit:

1. The plan must be reasonable;
2. The benefit plan must be approved by the Bureau of Internal Revenue (BIR);
3. The retiring official or employee must have been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement; and
4. The retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer.

Under the NIRC, the term “reasonable private benefit plan” means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

In practice, the private benefit plan (or simply the retirement plan) deems to have meet the reasonableness required under the NIRC when the “retirement plan rules” has the nod of the BIR.

Planning to avail of the early retirement benefit? Check first the above conditions.

(August 17, 2024)