Update: As of 1 January 2021, all companies based in Poland and employing less than 20 employees are required to implement Employee Capital Plans (PPKs) by 23 April 2021. Employers who fail to comply with the obligation to establish PPKs could be subject to a fine between PLN 1,000 and PLN 1 million.
The restructuring of Poland’s pension institutions, which has been anticipated since late 2017, has been approved to begin incremental rollout according to employee size from 1 July 2019, through 2021. Employers in Poland will now be required to automatically enroll employees in a qualified retirement savings plan under the government’s legislation establishing Employees’ Capital Pension Plans. The new type of private, defined contribution plan, Employee Capital Plans (PPKs), is for employers of all sizes.
Under the new plan, employers have a mandatory minimum contribution of 1.5 percent, with the option to contribute up to an additional 2.5 percent. Employees have a mandatory minimum contribution of 2 percent of pay (0.5 percent for employees earning below 120 percent of the minimum wage), with the ability to contribute up to an additional 2 percent of pay.
Poland’s current pension system allows employees to redirect up to 2.92 percent of their social security payroll tax contributions to privately managed, second-pillar open pension funds (OFEs). The government intends to eliminate this option and transfer 75 percent of existing OFE assets into new, simplified individual retirement accounts (IKZEs) while the remaining 25 percent will be transferred to the Demographic Reserve Fund of the social security system, effectively eliminating the current second-pillar system.
The new PPKs introduced in 2019 are intended to bolster occupational retirement savings. Although employees will be automatically enrolled, they will have the ability to opt out of the plan, making the plans similar to the voluntary, third-pillar private pension vehicles already available in Poland. Employee Pension Plans (PPEs) have been available since 1999, Individual Retirement Accounts since 2004 and Individual Pension Insurance Accounts since 2012.
Automatic enrollment and mandatory contributions
The automatic enrollment mandate applies to employees between the ages of 18 and 54 who have been with a company at least three months. New hires who meet the eligibility requirements need to be auto-enrolled within three months of employment. Upon enrollment, employees will have a three-month opt-out period, after which they would not be entitled to a return of contributions. Employees who opt out will be automatically re-enrolled every four years, with the possibility to opt out again after two months. Employees ages 55 to 69 will be able to enroll in the PPK plan on a voluntary basis.
The government will provide an annual subsidy of PLN 240 along with a one-time ‘welcome’ incentive of PLN 250 (about USD 70) to employees who do not opt out of the program.
Automatic enrollment staging dates
Implementation will begin on 1 July 2019, for companies with 250 or more employees, then on 1 January 2020, for those with 50 to 249 employees, and finally on 1 July 2020, for those with 20 to 49 employees. The rollout is scheduled to end by January 2021, at which time companies of all sizes, as well as the public sector, are expected to be compliant. Only the self-employed are excluded.
Both employers and employees are required to make contributions to PPK plans:
- Employees make a mandatory minimum contribution of 2 percent of earnings. (The contribution is decreased to 0.5 percent for employees’ earnings up to 1.2 times the minimum wage.)
- Employees may make additional voluntarily contributions up to 2 percent of earnings.
- Employers make a mandatory minimum contribution of 1.5 percent of employees’ earnings and may contribute up to an additional 2.5 percent of earnings. Additional employer contributions may be based on years of service.
Taxation of contributions and benefits
Employer contributions to PPKs are fully deductible from corporate income tax and excluded from the calculation of employer social security contributions. Mandatory employee contributions are not subject to employee social security contributions.
At retirement, employees can draw up to 25 percent of their individual account balances as tax-free lump sums. The remaining 75 percent will need to be converted into annuity payments subject to regular income tax. Employees are also able to draw up to 15 percent of their fund balances if they become disabled, and they can take five-year plan loans when they purchase their first homes.
Qualified PPE plans
Employers that offer qualified PPEs prior to July 2019 will not be subject to the new mandate, as long as the employer contributes at least 3.5 percent of pay to the PPE and at least 25 percent of employees are covered by the PPE. Employers with fewer than 10 employees may also be exempt from the new mandate only if all employees submit a formal declaration opting out of PPK participation.
There are currently four PPE vehicles recognized by the pension regulatory framework:
- Investment funds.
- Group life insurance linked to capital investment funds.
- Company pension funds.
- Foreign-managed voluntary occupational pension plans.
Investment funds are the most common PPE arrangement. Note that management fees for financial institutions managing PPK plans have been capped at 0.5 percent of net assets, with the potential for 0.01 percent additional success fee if returns exceed benchmarks.
Employers in Poland are encouraged to review their current retirement savings offerings. Employers will have to choose their PPK provider in consultation with their trade union organization or in consultation with employee representatives selected for this purpose if there is no trade union. Nonqualified plans will not be an approved replacement to a PPK plan, so employers offering an alternative retirement savings will need to determine whether they are exempt from setting up a PPK or if they need to consider establishing a qualified alternative.