Accrual of Retirement Benefit Liabilities by Philippine Companies
A practitioner-focused legal, accounting, tax and compliance primer
1. Why “accrual” matters
In Philippine practice a company’s retirement benefit liability (RBL) is rarely paid out until an employee actually retires, but the obligation arises—and must be recognized—while the employee is still rendering service. Failure to accrue correctly can lead to:
| Exposure | Typical consequence |
|---|---|
| Labor | NLRC awards of back retirement pay plus 10 % legal interest per annum from date of entitlement |
| Tax | Disallowance of deductions; deficiency income tax, surcharge & interest |
| Securities / corporate | Qualified opinion from auditors, delayed SEC filing, possible administrative fines |
| Criminal | Art. 303, Labor Code: fine + imprisonment for willful refusal to pay when due |
2. Core statutory framework
Article 302, Labor Code (formerly Art. 287) as amended by Republic Act 7641 (1993)
- Minimum retirement pay = “one-half (½) month salary for every year of service,” rounded up to six-month fractions.
- “½ month salary” = 15 days + 1/12 of the 13th-month pay + 5 days service-incentive leave (= 22.5 days), unless the CBA / plan is more generous.
- Coverage: all private enterprises except (i) government and GOCC employees covered by GSIS, (ii) employees of retail/service businesses with ≤10 workers, and (iii) domestic helpers.
Exemption via a “better” private retirement plan
- A company plan—once registered with the Bureau of Internal Revenue (BIR) and held under an independent trust—displaces the statutory formula if, viewed per employee, it is at least as beneficial.
- The exemption is strictly legal; an unregistered plan does not prevent employees from claiming RA 7641 benefits in addition.
Tax statutes
- Sec. 34(A)(1)(b), National Internal Revenue Code (NIRC) allows deduction for contributions only if the plan is “reasonable, funded and BIR-approved.”
- RA 4917 exempts retirement pay from income tax once every 10 years provided the employee is ≥50 years old and ≥10 years of service or the payment is under a BIR-qualified plan – whichever comes first.
- RR 1-68, RR 2-98, RR 6-2015: implementing rules on qualification, trust funding, benefit limits, reporting, and withholding.
Accounting standards
- Philippine Accounting Standard (PAS) 19, Employee Benefits (IFRS word-for-word)
- Distinguishes Defined Contribution (DC) vs Defined Benefit (DB) plans.
- Statutory RA 7641 benefit is DB because the amount is formula-driven and the employer bears actuarial risk.
- Philippine Financial Reporting Standard for SMEs, Section 28, offers simplified measurement but still requires actuarial valuation if a DB obligation is “material.”
- Philippine Accounting Standard (PAS) 19, Employee Benefits (IFRS word-for-word)
Other regulators
- BSP-regulated banks & insurers need Monetary Board approval before establishing or amending plans (Manual of Regulations for Banks X174).
- SEC may suspend the filing of audited FS if actuarial valuations are beyond 12 months old.
3. When does the liability “arise”?
| Scenario | Start of accrual | Supporting rule |
|---|---|---|
| Statutory RA 7641 benefit (no private plan) | First day of employment after the employee completes the six-month probation, because the benefit is mandatory and unconditional once length-of-service threshold (≥5 years) is likely | PAS 19.43: obligation exists when employee renders service in exchange for future benefits |
| Qualified DB plan | Date the employee first renders credited service under the plan | PAS 19.43 |
| Voluntary DC plan | Employer’s obligation limited to contributions; no accrual beyond unpaid contributions | PAS 19.44 |
Practical tip: Companies sometimes accrue only for employees already ≥60 years old. Auditors generally reject this; the obligation is pro-rated over each year of service, using the projected unit credit method (PUCM).
4. Measuring the RBL under PAS 19
| Valuation element | Philippine practice | Key considerations |
|---|---|---|
| Discount rate | Yield on Philippine peso government bonds matching the benefit duration; for plans with 12- to 15-year duration, 5 – 6 % p.a. is common (2024 levels) | Quoted corporate bond yields are not deep enough to satisfy PAS 19.83 |
| Salary escalation | Historical merit and CBA increases, 4 – 6 % typical | If a wage freeze is probable (e.g., distressed entity), must be supported by evidence |
| Employee turnover / disability / mortality | Philippine-specific tables (e.g., 2001 PMM) or company experience | If small workforce, actuary may revert to standard tables |
| Plan assets | Fair value of the externally-funded trust at reporting date | Mark-to-market with independent custodian statements |
Remeasurements (actuarial gains/losses, return on plan assets excluding interest) go to Other Comprehensive Income (OCI) and are never recycled. Service cost and net interest are charged to P&L.
5. Funding vs. Accrual
| Aspect | Accrual (accounting) | Funding (cash / trust) |
|---|---|---|
| Legal requirement | Yes, for all entities that prepare FS under PFRS or PFRS-SME | No Philippines law compels prefunding. RA 7641 benefit can be paid on a “pay-as-you-go” basis |
| Tax deductibility | Not applicable | Deductible only to the extent actually contributed to a BIR-qualified trust |
| Effect on liquidity | None (non-cash) | Immediate cash outflow but offsets future payouts |
Even without a statutory funding mandate, banks, multinationals and listed companies normally build a trust fund to (i) enjoy the tax deduction and (ii) smooth earnings volatility by matching assets with liabilities.
6. Tax rules in depth
Deductibility of contributions
- Limited to unfunded past service cost amortized over 10 years (or fewer if actuarially appropriate).
- Annual normal cost is deductible in the year contributed.
- Excess contributions over actuarial cost become non-deductible “prepaid pension” and create deferred tax assets.
Retirement benefit taxation
Situation Tax treatment to employee Withholding Meets RA 4917 conditions Exempt None Paid under a BIR-qualified plan (even if <50 data-preserve-html-node="true" yrs or <10 data-preserve-html-node="true" yrs service) Exempt None Statutory RA 7641 benefit from a non-qualified plan Taxable but subject to 8 % optional tax on excess over P90,000 if separation beyond employer’s control BIR Form 2316 reporting Excess voluntary benefit Taxable as compensation Regular withholding Fringe Benefit Tax (FBT) does not apply because retirement pay is expressly excluded (RR 3-98).
7. DOLE enforcement & jurisprudence highlights
| Case | G.R. No. | Ratio |
|---|---|---|
| Cruz v. Philippine Global Communications, Inc. (April 23 2012) | 195535 | Even if the company’s CBA granted a higher formula, the statutory minimum remains cumulative unless the CBA expressly states it is in lieu of RA 7641 |
| Atok-Big Wedge Co. v. Santos (Aug 9 2010) | 178594 | Lump-sum advance retirement payment is valid set-off against statutory benefit if freely and voluntarily accepted |
| Montilla v. NLRC / Wyeth Phils. (July 17 2013) | 202961 | Employer’s failure to fund a plan does not defeat the employee’s right to payment; obligation is direct and primary |
The core pattern: courts read RA 7641 liberally in favor of labor. Technical defenses—e.g., that the actuarial assumptions changed or that the company has not booked the expense—have never prospered.
8. Corporate transactions
- Mergers / spin-offs – The surviving entity automatically inherits RBL (Sec. 79, Revised Corporation Code). Vendors should quantify and price the Net Defined Benefit Obligation (NDBO) separately from working capital.
- Asset sales / outsourcing – If employees are terminated and rehired by a new employer, retirement benefits become immediately due (Art. 298, Labor Code). Parties often agree on an indemnity or adjust purchase price.
Due-diligence checklist: latest actuarial valuation, trust deed, BIR ruling, SEC filings, previous DOLE orders, NLRC cases, reconciliation of DBO vs. plan assets.
9. Road-map for compliance
| Step | Timing | Responsible | Deliverable |
|---|---|---|---|
| Draft or update retirement plan rules | Year 1 Q1 | HR + Legal | Plan text, trust deed |
| Seek BIR qualification | Q1–Q2 | Legal / Tax | BIR ruling, employer’s certificate |
| Constitute trust & seed initial asset transfer | Q2 | Treasury | Custodian statement |
| Annual actuarial valuation (PAS 19) | Every 12 mos | Independent actuary | Valuation report, PUCM workbook |
| Book accruals & remeasurements | Year-end close | Accounting | Journal entries + notes to FS |
| File BIR compliance reports (BIR Form 1209 etc.) | 60 days post FS issue | Corp. Secretary | BIR receipt |
10. Penalties and personal liability
- Art. 303, Labor Code – Fine ₱100,000–₱500,000 and/or imprisonment 2–4 years for non-payment of retirement benefits when due.
- Sec. 255, NIRC – 25 % surcharge + 12 % interest p.a. for deficiency tax; responsible officers may be criminally charged.
- SEC Fines – ₱10,000 plus ₱1,000 per day of delayed filing if actuary’s report is missing.
- BSP – Directors/officers of banks that fail to book actuarial losses promptly may be suspended under the “unsafe and unsound banking” doctrine.
11. Common pitfalls and how to avoid them
| Pitfall | Why it happens | How to fix |
|---|---|---|
| “Cash basis” recognition | Management focuses on cash flow, ignores accrual | Educate board; show effect on EBITDA and equity |
| Using 91-day T-bill as discount rate | Misreading PAS 19 | Use government bond yield curve matching average duration |
| Forgetting 13th-month and SIL components | Payroll system not parameterized | Update HRIS formula; reconcile to sample cases |
| No trust fund, but tax deduction booked | Incorrect tax accounting | Reverse deduction entries; set up trust retroactively |
| Over-funding without BIR approval | Aggressive tax planning | Secure BIR confirmation or treat excess as asset subject to recoverability test |
12. Emerging issues (2024-2025)
- Proposed “Universal Pension” bills in Congress, if enacted, may revise RA 7641 formula upward or impose mandatory prefunding; monitor Committee on Labor deliberations.
- Sustainability reporting (SEC Memorandum Circular 4-2024) – Listed companies will disclose social metrics including the funded status of retirement plans; creditors and investors are already factoring RBL into ESG scores.
- Digital actuarial modeling – The Actuarial Society of the Philippines (ASP) released a Philippine mortality improvement scale (ASP2024) that may reduce DBO by ~2–3 %. Early adoption is allowed under PAS 8.
13. Key take-aways
- Accrual ≠ prefunding but is legally required from Day 1 of service.
- RA 7641 sets only the floor; many liabilities stem from company or CBA promises that must be actuarially valued.
- BIR qualification unlocks tax deductions and income-tax-free benefits—but only if the plan is properly funded and documented.
- PAS 19 discipline—annual valuations, OCI remeasurements, extensive footnotes—is non-negotiable for entities with public accountability.
- Courts and regulators interpret retirement laws liberally in favor of labor; technical defenses on timing or accounting form rarely succeed.
Bottom line: Philippine employers that treat retirement benefits as a “tomorrow problem” court litigation, tax assessments and qualified audit opinions today. A robust accrual policy—grounded in law, actuarially sound and tax-compliant—is both a fiduciary duty and a competitive advantage.