Deductibility of Employer Contributions

June 8, 1990 BIR RULING NO. 116-90 29 (1) 095-85 116-90 Gentlemen : This refers to your letter dated November 15, 1989 requesting a ruling as to whether employer contributions made under Deposit Administration Contracts entered into between insurance companies and employers are deductible from the employer's taxable gross income. aisadc In reply, please be informed that in the Philippines, there are two (2) kinds of private retirement benefit plans, depending on the funding instruments adopted and used by the employer, namely: the so-called trusteed plan and the non-trusteed plan. Pursuant to Section 29(i) of the Tax Code, as amended, an employer's past service contributions to its employees' retirement pension plan are deductible only when such contributions are made or accrue to a trust . However, an insured plan established and maintained by an employer under a Deposit Administration Contract executed by and between the employer as the insured or policyholder and an insurance company as the insurer is a non-trusteed plan . The relationship between the employer and the insurance company is that of an insured and insurer and not one of trustor and trustee. Insurance companies under Philippine laws are insurers and are not authorized to perform trust functions. Such being the case, an employer is not entitled to a deduction for past service liability contribution made to an insured or non-trusteed plan such as one under a Deposit Administration Contract. The deductible contributions of the employer shall consist only of the premiums actually withdrawn from the Deposit Administration Fund . Premiums collected in connection with insured pension plans become a part of the insurer's general assets. The distinguishing characteristic of deposit administration contracts is the fact that employer contributions are not allocated to specific employees until retirement date. In other words, the actual purchase of annuities does not take place until an employee retires. (pp. 159, 219 & 223, Pension Planning by Allen, Melone and Rosenbloom, 3rd Ed.) Consequently, the employer may deduct the retirement benefit payments (but not the annuity premiums) to the extent that they are reasonable. Deduction would be permissible only in the year the retirement benefits are paid regardless of when accrued. [par. 2643.02, p. 30, 251, Vol. 3 CCH (1970)] cdta Very truly yours, (SGD.) JOSE U. ONG Commissioner