Effect of Moratorium on Funding to Tax Exemption Privileges of a Contributory Retirement Fund and Its Members

April 4, 1986 BIR RULING NO. 037-86 29 (c) (7) (A) 000-00 037-86 Gentlemen : This refers to your letter dated January 15, 1986 requesting information on the following queries: cdta "1. What is the effect to the tax-exemption privileges of a contributory retirement fund (Provident Fund) and its members if a moratorium on funding is taken as a recourse during these hard economic times? As an alternative, the company contribution that would otherwise go to the Fund shall be added to the current monthly compensation of the members under the same formula as provided for under the rules and regulations (By-Laws) of the fund? "2. Would a fund member's benefit who has complied with the minimum tenure of 10 years and 50 years of age be subject to income tax if such benefits are released to him while on active employment with the same employer?" In reply, please be informed as follows: 1. The benefits and the privileges to which a qualified retirement benefit plan is entitled under Section 29(c)(7)(A) of the Tax Code shall continue to be enjoyed by the Plan even if there is a moratorium on its funding due to the current economic crises. However, the usual contributions of the employer-company to the Fund that would instead be paid proportionately in addition to the current monthly compensation of the employee-member shall be taxable income to the recipient employee-member in the year in which so paid at the rate prescribed by Section 21(a) in relation to Section 82 (formerly Sec. 91), Chapter XI, Title II of the Tax Code as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82 dated October 1, 1982; and a deductible expense on the part of the company in accordance with Section 50(a)(1)(A) of the same Code. 2. Pursuant to Section 29(c)(7)(A) of the Tax Code, the benefits received upon retirement by a private employee-member under a reasonable private retirement benefit plan duly approved by this Office shall be exempt from income tax. In other words, the provisions of the Plan on normal and/or optional retirement, among others, should be met by the members in order that the retirement benefits may be exempt from all taxes. Such being the case, even if a member has met the length of service and age requirements, i.e., at least 10 years of service with the company and 50 years of age, under Section 29(c)(7)(A) of the Tax Code, any and all amounts actually distributed from the Fund to the private employee-member before his retirement from the service of his employer or while still on active employment with the company, over and above his personal contributions shall be taxable to said employee-recipient as wages in the year in which so distributed. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner