All About Pension Plans
Moshe Egel-Tal, CSPP – Payroll and Labor Law Specialist
As of January 1, 2008, an expanded regulation order regarding a mandatory pension plan for all employees in Israel went into effect.
What are the criteria for a pension?
The criteria for eligibility are as follows; ♦ Age – male from age 21 and female from age 20 ♦ If an employee has an existing active pension plan, they are eligible for continuation of the plan after three months of tenure, retroactive to their start date. ♦ If the employee does not have an existing active pension plan, they are eligible after six months of tenure (not retroactively).
What is a pension plan?
A pension plan is a long-term savings plan intended for retirement. The plan has several components. The employee's contribution and the employer's contributions are savings and the employer's contribution towards severance pay. The percentages of each contribution are defined specifically in the expanded regulation order. A pension plan can be in a pension plan company or an insurance company, in which case it is called "manager's insurance" (bituach menahalim).
There are several differences between a pension plan and a manager's insurance. Most notably, a manager's insurance can only be via an insurance agent agency, while a pension plan can be either via an agent or directly from the pension plan provider company. A pension plan has a built-in clause for loss of workability (lowa) insurance at 75% of your insured salary. This is mandatory by law. The manager's insurance policies have the lowa insurance as a separate component that the employer needs to pay in addition to the other components (see below).
Choice of the pension plan and insurance agent
An employer is required to allow each employee to choose their preferred pension plan provider/company as well as the insurance agent. An in-house insurance agent or company that the employer has chosen cannot be mandatory for all employees. However, there are several "default pension plans" from which the employer is allowed to choose one. This plan allows automatic signup by the employer for employees without the need for a health declaration or employee's signature. This is meant to be used for any employee who is eligible for a pension but failed to supply the employer's payroll department with the details of their existing or chosen pension plan and thus enabling the employer to eliminate the exposure to regulation for non-compliance, as well as possible lawsuits. Signing up for a pension plan is relatively simple and can be done online on the pension plan's website. The Ministry of Finance has set up a website dedicated to information on all the pension funds in Israel.
On this site, one can compare revenue and management fees, as they differ from one plan to another. While the management fees are an important factor, it is not the only criteria that should be taken into account when choosing a plan. It is recommended to seek professional advice. It is important to stress that the employee's right to choose the pension plan fund/company/insurance agent always exists and the employee can change their plan at any given point and time, but it is the employee's responsibility to send the employer's payroll department the needed information so they can update the payroll program accordingly.
Percentages of contributions
The employee's contribution is 6%. This is deducted from the gross pay. Usually from the base pay and occasionally from additional components such as sales commissions and global over time. The employee can raise their contribution up to 7% via notification to the employer. This can be very substantial with regard to the monthly pension amount they receive upon retirement.
The employer's contribution is 6.5% towards savings. There is an additional contribution towards severance pay at a 6% minimum. If the employer contributes 8.33%, it can be in place of severance pay. If the employer contributes 6% and the employee is terminated and eligible for severance pay, the employer may need to do an additional payout of 2.33%
If the employee's pension is in a manager's insurance the lowa insurance is also paid by the employer. If it is more than 1.5%, the employer's contribution can be lowered accordingly but needs to be 5% minimum.
Employees can transfer their pension plans from one employer to the next when changing jobs. There is no limit to the number of times this can be done.
If the place of employment has a pension package that offers better terms than the above, these better terms would take precedence.
If one is employed in several places simultaneously, each employer needs to make contributions towards pension individually. This can be in the same plan.
When leaving a place of employment, for any reason – whether terminated or resigning your position, the employer is required to issue a "letter of release" addressed to the pension plan/insurance company releasing all the monies accrued in the employee's name to the employee. This needs to be accompanied by a 161-tax form – and received by the employee within 15 days of the date of the end of employment.
While occasionally severance pay can be withdrawn from the pension plan at the end of employment, this is highly not recommended as an employee who does so will lose on several accounts: They will receive 40% less in their monthly pension payments at retirement. They will cut off the continuity of tenure with all employers resulting in a much lower tax-free amount at retirement. They may be taxed on said withdrawal.
For an employee whose previous employer contributed 8.33% towards severance pay, a new employer must continue the same % and cannot contribute only 6%.
In most cases, since 2008, section 14 of the severance pay law is applicable and this results in no additional payout as well as ensuring the release of the severance pay to the employee even upon resignation.
The information above is for general knowledge and does not replace professional advice, which should be sought out on an individual basis. The above is not legal advice nor is it a recommendation to act or not. It is meant only as a service to the public. The author is not a licensed pension plan advisor or insurance agent.
Moshe Egel-Tal is a certified senior payroll professional with over 25 years of experience in all facets of Israeli payroll in both the private and public sectors and has an extensive working knowledge of Israeli labor laws and employee’s rights and was the payroll department manager of a bank. He has processed thousands of payslips per month. Moshe served as a public representative in the labor court for five years, is a frequent lecturer, an avid blogger, and author of several publications on payroll and labor law issues. He offers complete payroll services for Israeli registered employers and private paid consultation on employee's rights