The Japanese Ministry of Health and Welfare recently published a proposal aimed at reforming defined contribution (DC) plans by raising DC contribution sub-limits and relaxing individual DC plan (IdeCo) participation requirements for employees contributing to DC employer-sponsored pension plans.
The proposal is currently being discussed and if passed, the changes won’t be effective before October 2022.
Since the introduction of DC pension plans in 2001, employer-provided pension arrangements have gradually shifted from defined benefits (DB) plans to DC plans, or a combination of DB and DC have been offered as complementary plans.
When a DC plan is part of a retirement offering, there can be issues for employees to additionally contract their own individual DC plan, and since the total contributions to DC plans cannot exceed JPY 55,000 and there are fixed sub-limit maximums for contributions to IdeCo or DB plans, employees have not been able to maximize their retirement savings.
As a result, the government has looked to relax the contribution structure under one overall limit with flexible sub-limits by plan or contributor as long as the overall maximum of JPY 55,000 is not exceeded.
Individual DC plan (IdeCo) participation limitations removed
Employer-sponsored DC pension plans are plans contracted by the employer through a vendor with investments and contribution rates chosen by the employer and participation offered to the entire group of their employees. IdeCo DC plans are individual plans contracted by the employee with a pension institution. Individual DC plan participation is limited for employees contributing to DC employer-sponsored pension plans to those situations where the rules of the employer-sponsored DC plan specifically allow simultaneous enrollment in both the IdeCo and employer-sponsored plans. The proposal seeks to encourage IdeCo plan engagement by removing this requirement and allowing individuals to freely contract an IdeCo plan.
Currently, companies that do not have a DB plan in place have three options when they set up an employer-sponsored DC plan:
- Set the contribution cap at JPY 55,000 per month with employer only contributions. In this case, employees cannot make any contributions to either the DC employer-sponsored plan or DC individual plan.
- Set the contribution cap at JPY 55,000 per month with plan rules that allow employees to only contribute towards retirement under the employer-sponsored DC plan. In this case, employees can contribute only up to the difference between JPY 55,000 and employer contribution.
- Set an employer contribution rate of less than JPY 35,000 in the DC employer-sponsored plan and set the plan rules to also allow the employees to contribute to an IdeCo plan up to the maximum mandatory limit of JPY 20,000. In this case, the employee makes no contributions to the employer-sponsored plan; however the overall maximum contribution limit of JPY55,000 between the two plans still applies.
If the bill passes, beginning October 2022 employees will be able to choose whether to contribute to the employer-sponsored DC plan or to a DC individual plan by themselves if the employer contribution is below JPY 55,000 per month. If employees choose to contribute to the DC individual plan, they can do so up to JPY 20,000, or JPY 55,000 minus the employer contribution, whichever is less.
DC contribution sub-limits increase
Under current legislation, employer-sponsored DC contribution caps are as follows:
- JPY 27,500 per month when a DB plan is also offered; is irrespective of the amount of the DB contribution
- JPY 55,000 when there is no DB plan in place
Under the proposed changes, a total contribution cap of JPY 55,000 will be set for both DC plan and funded DB plans with flexible contribution sub-limits for the DC and DB plans so long as the total contribution cap is not exceeded. As the DB accruals/contributions require some evaluation, the level of the DC contribution sub-limit will be determined by subtracting the hypothetical DB contribution from the total JPY 55,000 limit. For example, if the DB standard contribution amount is equivalent to JPY 15,000, the DC contribution cap will be JPY 40,000. The DC contribution cap will decrease or increase depending on the DB contribution amount within a total contribution cap for both plans of JPY 55,000.