RMC No. 39-2014: Clarifies the tax treatment of payouts by employee pension plans

Key points

1. General rule. Section 60(A) subjects the income of any kind of property held in trust to Income Tax.
2. Exemption for employee trusts. Section 60(B) exempts an employee’s trust forming part of an employer’s pension, stock bonus or profit-sharing plan for employees. Contributions must be made by the employer, the employees, or both, to distribute earnings and principal to employees under the plan. Under the trust instrument, it must be impossible, before all liabilities to employees are satisfied, to use or divert any part of the corpus or income for purposes other than the employees’ exclusive benefit.
3. Exception to the exemption. Section 60(B) taxes, in the year distributed, any amount actually distributed to an employee or distributee to the extent it exceeds the amount that person contributed.
4. Benefits taxable to employees. The entire benefits paid by such a plan are taxable to the employees in the year distributed. This does not apply to payouts that return an employee’s personal contributions, or to retirement benefits exempt under Section 32(B)(6)(a) of the NIRC.

Who is affected

• Employees and distributees receiving payouts from employer pension, stock bonus or profit-sharing plans

Deadlines and effectivity

• Taxable in the year distributed
• Issued May 12, 2014