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One way for employers to reward their employees is by having the employee forgo a portion of their salary in exchange for a benefit. This could, for example, be for healthcare insurance, company cars, bicycles, upgraded equipment, and more. However, one of the most common and potentially advantageous solutions is salary sacrifice for pensions.
Salary Sacrifice as a Benefit
In its simplest form, salary sacrifice for pensions is an agreement between the employer and employee that enhances the employee's occupational pension through a deduction from the gross salary. Instead of being paid out, the deduction is transferred to a specific occupational pension solution. The most common practice is for the employee to sacrifice a portion of their gross salary monthly, but it's also possible to sacrifice bonus payments.
Who Can Opt for Salary Sacrifice?
There's no set rule on who can opt for salary sacrifice for pensions, but consideration should be given to the income level. The employee should be somewhat higher-paid to engage in salary sacrifice – the gross income after deduction for pension sacrifice should not fall below 8.07 income base amounts (51,245 SEK/month in 2024). Otherwise, the employee risks reducing their basic pension, sickness benefit qualifying income (SGI), parental benefits, and other social insurances.
What Should the Employer Consider?
Regardless of whether the employee chooses to sacrifice bonuses or regular income, several considerations apply for the employer. Despite the extra administrative burden involved in salary sacrifice, it's considered a significant competitive advantage in the job market.
Some aspects that employers may need to address include:
- Conducting negotiation processes
- Finding advisors
- Identifying insurance providers or brokers
- Planning and establishing new financial flows
- Updating HR documentation, such as the employee handbook
- Creating supplementary agreements
Supplementary Agreements to Employment Contracts
When an employer wants to offer salary sacrifice, it's crucial to create a supplementary agreement that is clear to both the employer and the employee.
The supplementary agreement should include information such as:
- Whether other insurances, such as premium waivers, should be included
- The amount of premiums/payments and deductions
- When and how the salary sacrifice and the agreement can be terminated
- Responsibilities of the parties
- Conditions, e.g., what happens if an employee is sick, takes leave, or is on parental leave, etc.
- Cost neutrality
Also note that if the employer wishes to utilize special deduction rights on pension premiums, an agreement, known as a commitment, is also required.
Cost Neutrality
As pension income tax is lower than the social contributions on salary, the employer can offer to increase the salary sacrifice by approximately 5.8%. This way, the salary sacrifice becomes beneficial for the employee without costing the company more. Thus, the salary sacrifice becomes cost-neutral in this manner.
Reporting of Pensionable Salary
It's essential for the employer to consider how the insurance solution should be structured as a whole. How should pensionable salary be reported and to whom? What options do employers have for reporting pensionable salary to the pension selection center?
If an employee has a premium-based solution, the employer can make an extra contribution to cover the lost portion of the old-age pension premium that decreased when reporting gross salary after salary sacrifice. If your pension provider allows it, employers can report gross salary both before and after salary sacrifice. The employer then doesn't need to compensate for the lost old-age pension. Thus, the old-age pension can be based on the higher salary, while the collectively agreed-upon sickness insurance and other insurances are based on the lower reported salary.
Salary Sacrifice Affects More Than Just Your Employees' Pensions
The process involves additional administration, documentation, and calculations required for a successful salary sacrifice, and then decisions need to be made regarding who will manage the pension solution.
At Azets, we have extensive experience with benefits and regulations surrounding benefit packages. If you, as an employer, have questions or concerns about salary sacrifice or wish for suggestions for suitable benefit packages, please feel free to contact us.
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