Guidelines: Tax treatment on Separation Benefits
received by officials and employees due to death,
sickness, or other physical disability and the
issuance of Cert. Of Tax Exemption from income
tax and withholding tax
Sec. 32(B)(6)(b) NIRC:
- any amount received by an official or employee
or his heirs
- due to death, sickness or physical disability, or
for any cause beyond the control of the
employee
- shall be excluded from gross income and
exempted from income tax
- regardless of the age or length of service
Before:
Request for rulings from the Law Division of the
National Office are secured by the separated
employees of private entities, and submit to the
employers as proof of exemption from income
and withholding tax
Now:
- Certificate of Tax Exemption shall be issued
by the Regional Director.
- However, request for ruling is still processed
in Legal Division, National Office.
Documentary Requirements:
1. Letter request (employee, heir or employer);
2. Death – Certified true copy of Death Cert.
3. Sickness/Physical Disability:
-Sworn affidavit of attending physician
and employer’s head of office or
representative;
-Clinical Record
-Laboratory examination or medical
certificate
(Checklist of Requirement)
Separation Benefit is exempt from:
- Income tax [Sec. 32(B)(6)(b) NIRC] and
-withholding tax (Sec. 79 NIRC, RR 2-98, RR 6-01, RR 12-01)
However, Income received prior to separation.
Not exempt
Private Retirement Benefit Plan Regulations
Pursuant to Sec. 79(B)

RA 4917 – exempts from all taxes the Retirement
Benefits received by officials and employees of
private firms under a reasonable private benefit
plan maintained by the employer and all
amounts received on account of involuntary
separation (death, sickness, physical disability,
any cause beyond control)
(a) The plan must be reasonable;
(b) Retiree must have been in service for at least 10
yrs and not less than 50 y.o.
(c) Retiree have not availed of the privilege
under a retirement benefit plan of the
same or another employer
-
-
Pension;
Gratuity;
Stock bonus;
Profit-sharing plan (contributory on noncontributory on the part of the employee
(a)
(b)
(c)
Written Program – definite provisions
essential for qualification;
Permanency – permanent and continuing
program;
Coverage:
Percentage Basis:
– must cover >=70% of all officials &
employees
- (eligibility) 70% of all officials & employees
and 80% of eligible must be covered
- Excluding:
(a) employed less than the minimum
length of time stated in the plan;
(b) works 20 hrs a week or less;
(c) seasonal employees (=<5 mos.)
(2) Classification Basis – with prescribed
classification set-up and limit coverage
* certain classification
* prescribed age
* years of employment
(should not be discriminatory)
(d) Contribution – employer, officials &
employees or both contribute to a trust fund
* with a purpose to distribute the
corpus and income of the fund in
accordance with the plan
(e) Impossibility of Diversion – the corpus or
income of the fund should not be diverted but
only for the exclusive benefit of the officials or
employees
(f) Non-discriminatory – no discrimination in
contributions or benefits;
(g) Non-forfeitures – must provide for nonforfeitable rights on benefits or amount credited
to his account;
(h) Forfeitures – must provide that forfeitures must
not be applied to increase the benefits any
employee would receive at any time prior to the
termination of the plan. Forfeited amounts must
be used to reduce the employer’s contribution
(i) Trust – retirement fund should be administered
by a trust.
INVOLUNTARY SEPARATION
all amounts of separation benefit are EXEMPT
From all terms and attachment, garnishment, levy,
seizure except to pay a debt in a criminal action
(a) Pension Plan – established plan by employer to
provide systematically for the payment of
determinable benefits after retirement
(b) Profit-sharing Plan – plan to provide for the
participation in the profits by employees or their
beneficiaries;
(c) Stock-Bonus Plan – similar to profit sharing except
that contributions by employer is not dependent on
profit. Benefits are distributable in stock.
(d) Gratuity Plan – for payment of definitely
determined benefits of the employees after
retirement. Same as pension plan but benefits
are paid immediately after retirement
(e) “at no time shall any part of the corpus or
income of the fund be used for, or diverted to,
any purpose other than for the exclusive benefit
of the said officials and employees”
- includes all objects or aims not solely
designed for the proper satisfaction of all
liabilities to employees covered by trust
(f) “for any cause beyond the control of said
official and employee” - separation was not in
his own making, not be asked for or initiated by
him
Note: Whether or not a separation is beyond the
control of the official or employee, being
essentially a question of fact, shall be determined
on the basis of the prevailing facts and
circumstances.
INVESTMENT
Generally, the fund may be used by the trustees
to purchase any investments permitted by trust
agreement. However, the exemption of the trust
income under Sec. 56(b) of NIRC may be denied if:
(a)
Lends any part of it income w/o adequate security
and reasonable rate of interest;
(b)
Pays any compensation in excess of a reasonable
allowance for salaries for other personal services
actually rendered;
(c) Makes any part of its services available on a
preferential basis;
(d) Makes any substantial purchase more than
adequate consideration in money or money’s
worth;
(e)Sells substantial part of its securities or
properties for less than money’s worth;
(f)Engages in any transaction whish results to
diversion of its income or corpus;
Determination of Qualification:
- Before availing of the privileges afforded by the
Plans, employers must submit to the CIR, fill out
the BIR Form 17.60 and accompanied by written
program constituting the plan and the trust
instrument.
Coverage of the exemption:
- RA No. 4917, June 17, 1967
(Pls. See Retirement Benefit Plan Information Sheet attached in
your hand outs)