Tax Articles

Retirement from Employment in Time of Covid

By: Atty. Rodel C. Unciano

It is quite certain that Covid-19 pandemic has forced a number of employees to prematurely retire from employment. And when we talk of retirement, the question to ask is whether or not the retirement benefits received by the retiring employee are exempt from tax.

Existing rules do exempt retirement benefits from tax, subject to compliance with certain conditions. Under the Tax Code, retirement benefits received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer are exempt from tax provided that the retiring official or employee has 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 his retirement. This can be availed of by an official or employee only once.

If the employer does not maintain a reasonable retirement benefit plan, the Labor Code requires that an employee, upon reaching the age of sixty (60) years or more, but not beyond sixty-five (65) and who has served at least five (5) years of service in the said establishment may retire and shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service. This retirement benefit is likewise exempt from tax.

In response to Covid-19 pandemic, Republic Act (RA) 11494 or the “Bayanihan to Recover as One Act” likewise provides tax exemption of retirement benefits received by officials and employees of private firms from June 5, 2020 until December 31, 2020. The tax exemption is on condition that the official or employee shall not get re-employment in the same firm within the succeeding twelve (12) month period. Re-employment in the same firm shall be considered as proof of non-retirement, and shall subject the benefits received to appropriate taxes.

RA 11494 has apparently relaxed the conditions on tax exemption of retirement benefits received by officials and employees of private firms during the pandemic. In fact, the law provides no condition for exemption except that the retirement benefits must be received by the official or employee of private firms, whether individual or corporate, for the period from June 5, 2020 to December 31, 2020. However, under Revenue Regulations (RR) 29-2020, the amount received should be in accordance with a retirement plan duly registered with the BIR. This requirement poses a legal issue since this condition was not provided under RA 11494. The only requirement for exemption under RA 11494 is that the retirement benefits must be received by the employee for the period from June 5, 2020 until December 31, 2020.

Also, RA 11494 provides that re-employment of the official or employee in the same firm shall subject the benefits received by the official or employee to appropriate taxes. As the law is worded, the tax exemption does not apply if the employee gains re-employment with the same firm within the succeeding twelve (12) month period. However, under RR 29-2020, the disqualification for tax exemption applies not only in case of re-employment of the official or employee in the same firm but also in case of re-employment in the firm’s related parties. This disqualification of tax exemption due to re-employment with the firm’s related parties likewise poses a legal issue since this condition was not provided in RA 11494.

Under RR 29-2020, if re-employment happens within the calendar year 2020, the employer shall include the said retirement benefits in the gross income of the concerned official or employee for 2020. However, if the re-employment will occur in 2021 and within the twelve (12) month period, the concerned employee shall pay the taxes due on the retirement benefits received within thirty (30) days from date of re-employment or on the due date for the payment of 2020 income tax, whichever comes later.