Employee capital plans – Possibility of discontinuing contributions, early withdrawal of assembled funds

In our previous Newsletters, we explained the general idea of the employee capital plans and the basic duties in this regard. Below, we will outline the possibility of discontinuing contributions into an employee capital plan (PPK) and discuss cases where early pay-out may be available.

Discontinuation of contributions (opting out)

The underlying idea of PPKs is that, as far as the employees are concerned, they are voluntary. The corollary is that, at any given moment, an employee who has decided to join in a PPK may opt out by submitting a declaration to that effect.

A PPK participant who submits such a declaration remains free to resume contributions to her/his employee capital plan at a future date. At the same time, a participant who does not want to contribute will be asked to repeat her/his declaration to that effect at 4-year intervals. If the employee does not fulfil this duty, her/his employer will be automatically obligated to resume PPK contributions on that employee’s behalf. Certain exceptions apply – the latter mechanism will not kick in for PPK participants who turn 70 before 1 April of the year in which 4 years since their last opt-out declaration; in the case of an employee who turns 55 in this period, meanwhile, contributions will resume exclusively at such participant’s express request.

The employer must extend equal treatment to employees who actively participate in employee capital plans as well as employees who opted out.

An employer who attempts to prevail on its employees to not participate in PPK, meanwhile, may be fined up to 1.5% of its remunerations fund for the preceding financial year.

Early pay-out of funds

As mentioned in a previous Newsletter, the general rule is that an employee participating in a PPK receives the accumulated funds once she/he turns 60. Yet the legislature has provided for certain exceptional circumstances in which an employee may tap PPK funds at an earlier date.

Covering down payment towards a home purchase

A one-time pay-out of up to 100% of the PPK fund balance may be made to cover the employee’s out-of-pocket contribution at taking out a mortgage loan to purchase a flat, finance construction of a home or purchase a real property. Such disbursement proceeds upon production of the contract executed with the financial institution. This is, in essence, an interest-free loan, in that the PPK participant will be obligated to return these funds in their full nominal value at some point between 5 and 15 years following the pay-out. If the employee breaches the repayment deadlines defined in the contract with the financial institution, she/he will become liable for personal income tax at 19%.

The possibility of tapping the employee capital plan account for a down payment on a mortgage loan, as described above, is open only to employees aged less than 45 when they apply to do so.

Grave illness

A PPK participant may apply for disbursement of up to 25% of her/his PPK account balance in the event of grave illness of the employee, her/his spouse or child.

For these purposes, grave illness may include (i) complete inability to work, (ii) moderate or significant disability, (iii) disability of a person aged less than 16 or (iv) one of the medical conditions enumerated in the PPK Act.

A withdrawal from the PPK account effectuated on this basis is not subject to repayment by the employee.

In our next Newsletter, we will discuss issues associated with changing employee capital plans, for example in the wake of a job change by the participant.