Social Insurance Programs Provide Safety Nets for Employees

Social insurance programs are an important part of the payroll cycle because employees directly receive benefits from their contributions, a global payroll consultant said May 8.

“Social insurance is the thing that gets me up in the morning when I’m thinking about payroll,” said Tim Kelsey, FCIPP, AIPA, Managing Director of Kelsey’s Payroll Services. He added that he considers it the second most important process in payroll besides giving employees their net pay because of the direct benefit employees receive from the programs.

General Characteristics

Social insurance programs tend to have entry and exit ages that determine when coverage begins and when mandatory employee social taxes often stop or reduce, respectively, Kelsey said. The programs generally have separate coverage for employed and self-employed workers, who may receive different benefits, he said.

Individuals may be allowed to make voluntary contributions, which would not generally be done through payroll, Kelsey said.

Different categories of employers may have different contribution rates, Kelsey said. Examples of categories can include young workers or apprentices; special types of employment such as mariners, mining, or agriculture; special areas such as free trade zones; or company directors, he said. However, “if in doubt, treat a person as a standard employee” until they provide evidence otherwise, he said.

Kelsey spoke at PayrollOrg’s 42nd Payroll Congress in Nashville.

Contributions are usually calculated based on the earnings for each period, instead of on cumulative wages throughout the year like income tax, and often are subject to an earnings ceiling, Kelsey said. He used the Netherlands’ ceiling as an example of a “progressive cumulative calculation,” where the current ceiling of 5,969 euros per month (US$6,458.31) is compared to year-to-date wages actually earned and the lower of the figures is used to calculate contributions.

The UK only has a monthly ceiling for the purpose of lowering employee contribution rates, but uses a similar cumulative calculation for company directors because they could potentially decide their own pay, Kelsey said.

When figuring assessable pay for social taxes, it is important to compare assessable pay to what is taxable for income tax, Kelsey said. Types of pay that are subject to income tax may not be subject to social taxes, but it is rare for a payment to be subject to social taxes but not income tax, he said.

Taxable pay for income tax is often reduced by social taxes paid. When that is the case, social taxes are calculated first, Kelsey said.

Legislation describing assessable pay can sometimes be vague, Kelsey said, citing Kenya’s National Social Security Fund Act, which only refers to “monthly pensionable earnings” as assessable. Its regulations exclude “fluctuating emoluments” from monthly pensionable earnings, going on to list allowances and benefits in kind as fluctuating but not payments such as bonuses or overtime pay, Kelsey said. In such jurisdictions, employers should clearly define all elements of pay they want to give to employees, he said.

Contributions, Reporting

Most social insurance programs use the basic method of multiplying the assessable pay by the contribution rate to determine contributions, Kelsey said. The primary alternative in a handful of jurisdictions is what Kelsey called “salary grades,” where all employees who earn wages within a certain range have a specific value, often the midpoint of the range, used to calculate contributions.

In those jurisdictions, “you’ve really got to watch out for when people have salary changes,” Kelsey said, as that can affect what grade they are in.

In Japan, for example, an employee’s salary grade for pension contributions is based on wages earned from April to June, and changes to grades generally take effect in September, Kelsey said. Each grade, its midpoint, and the corresponding contribution based on the midpoint is published in a table, he said.

There are also caveats, such as that movements up by at least two grades because of salary increases take effect immediately, Kelsey said. If an employee is on maternity leave during the April to June period, the three-month assessment is moved to after the employee returns if it would cause a drop in grade, he said.

Most jurisdictions require employers to regularly report contributions paid, but may also require earnings to be reported in a format other than gross pay, Kelsey said. For example, Ireland uses “insurable weeks” for its Pay Related Social Insurance, where the first week of each year starts on Jan. 1, the second on Jan. 8, etc., and may not match an employee’s working week. These reports help establish an employee’s record for calculating benefits, he said.