RETIREMENT LAW

REVISITED
ATTY. ADA D. ABAD

CEAP

LEGAL COUNSEL
CEAP RETIREMENT FUND
CEBU WATERFRONT HOTEL
21 SEPTEMBER 2010, 4:00-5:30PM
CEAP RETIREMENT FUND LECTURE
OF ATTY. ADA ABAD 092110

RETIREMENT
DEFINED:

A. withdrawal from one's position or occupation

or from active working life
B. The period of a person's life during which
he/she is no longer working, or the
commencement of that period.
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CEAP RETIREMENT FUND LECTURE

OF ATTY. ADA ABAD 092110

CEAP RETIREMENT FUND LECTURE

OF ATTY. ADA ABAD 092110

GENERAL RULE:
RULE

R.A. 7641

a.OPTIONAL at 60 years with minimum

5 years of service

b.MANDATORY at 65 years, no
service requirement

EXCEPTION:
EXCEPTION
Where the company provides for a
Retirement Plan with earlier
retirement age, then the companys
Retirement Plan will apply
CEAP RETIREMENT FUND LECTURE
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CEAP RETIREMENT FUND LECTURE

OF ATTY. ADA ABAD 092110

GENERAL RULE:
RULE R.A. 7641
month for every year of service
(expanded concept)
EXCEPTION:
EXCEPTION
Where the School or company
provides for a Retirement Plan with
better benefits, then the companys
Retirement Plan will apply
CEAP RETIREMENT FUND LECTURE
OF ATTY. ADA ABAD 092110

TWO GOVERNING LAWS ON

RETIREMENT BENEFITS:
A.REPUBLIC ACT NO. 7641,
7641 otherwise
known as the RETIREMENT PAY LAW
enacted on 09 December 1992
B.REPUBLIC ACT No. 4917, which amends
the National Internal Revenue Code on
exemption from taxes of retirement benefits

CEAP RETIREMENT FUND LECTURE

OF ATTY. ADA ABAD 092110

COMPANIES
WITHOUT
RETIREMENT
PLAN
R.A. 7641

COMPANIES
WITH A
RETIREMENT
PLAN
R.A. LESS
7641
BUT
CEAP RETIREMENT FUND LECTURE
OF ATTY
. ADA ABAD 092110
BENEFIT

COMPANIES
WITH A
RETIREMENT
PLAN
R.A. 4917
9

COMPANIES
WITHOUT
RETIREMENT
PLAN
RETIREMENT LAW TO
APPLY
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COMPANIES WITH A
COLLECTIVE
BARGAINING
AGREEMENT OR
RETIREMENT PLAN
BUT SAME OR LESS
BENEFITS THAN
MINIMUM
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1. WHO MAY BENEFIT?

ALL EMPLOYEES IN THE PRIVATE COMPANY,
REGARDLESS OF POSITION AND CLASSIFICATION.
They
shall
include
part-time
employees,
employees of service and other job contractors
and domestic helpers or persons in personal
service of another.

2. WHO MAY NOT BENEFIT?

GOVERNMENT EMPLOYEES
EMPLOYEES OF RETAIL AND AGRICULTURAL
ESTABLISHMENTS EMPLOYING TEN OR LESS
EMPLOYEES
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3. PARAMETERS FOR AVAILMENT

MANDATORY AT 65 YEARS OF AGE, NO
SERVICE REQUIREMENT
OPTIONAL AT AGE 60, WITH FIVE (5) YEARS
SERVICE REQUIREMENT
IF COMPLIED WITH, BENEFITS ARE TAXEXEMPT.

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HOW MUCH IS THE BENEFIT?

4.

4.1 FOR THOSE PAID REGULARLY -- ONE-HALF

MONTH SALARY COMPUTED AT 22.5 DAYS PER
CAPITOL WIRELESS VS. CONFESOR CASE.
(REITERATED IN STA. CATALINA SCHOOL VS. NLRC 2003 CASE)

Components of one-half month

salary =
15 days x latest salary per day)
+ 5 days leave x latest salary per day)
+ 1/12 of 13th month pay
+ All other benefits that the employer and

employee may agree upon that should be included

in the computation
of the employees retirement
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OF
ATTY
.
ADA
ABAD
092110
pay.

NOTE: The fifteen (15) days salary of

the employee is that based on his
latest salary rate.
Except:
(a) cost of living allowances
(b) profit-sharing payments
(c) other monetary benefits which are not
considered as part of or integrated into the
regular salary of the employees.
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4.2 FOR THOSE PAID BY THE RESULTS

AND DO NOT HAVE FIXED MONTHLY
RATE
The basis for determination of the salary for fifteen
days shall be their average daily salary

(ADS).
The ADS is the average salary for the last twelve
(12) months reckoned from the date of their
retirement, divided by the number of actual
working days in that particular period. (Source:
Section 5.2 and 5.3 of the Rules Implementing the New Retirement
Law)
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5.

IS THE RETIREMENT PAY UNDER

RA 7641 TAX-EXEMPT?

YES, any retiree who satisfies the requirements

of R.A. No. 7641 (retirement under a CBA or
other applicable employment, and service for
at least five years) is entitled to the tax
exemption,

even if he is a member of a reasonable private

benefit plan established by his employer and
approved by the BIR,
PROVIDED that the retirement benefit he receives
from the Plan is equal to or less than the minimum
requirement benefit
provided by R.A. No. 7641
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6. REQUIREMENTS FOR TAX

EXEMPTION UNDER RA 7641

There is no collective bargaining agreement or

other applicable employment contract providing
for retirement benefits for an employee; OR there
is a collective bargaining agreement or other
applicable employment contract providing for
retirement benefits for an employee, but it is
below the requirements set for by law.

Employees reached the age of 60 years or more,

but not beyond 65 years

Employees rendered at least 5 years in service

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CEAP RETIREMENT FUND LECTURE

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COMPANIES WITH A
COLLECTIVE
BARGAINING
AGREEMENT OR
RETIREMENT PLAN
RETIREMENT PLAN TO APPLY
TAX-EXEMPT SUBJECT TO
CONDITIONS UNDER RA 4917
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1. WHO MAY BENEFIT?

AVAILMENT WILL INDUBITABLY
DEPEND
UPON
THE
PARAMETERS GIVEN BY THE
RETIREMENT PLAN ITSELF

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CEAP RETIREMENT PLAN,

ARTICLE 10.
SEC. 1: THE NORMAL
RETIREMENT DATE UNDER CEAP
RETIREMENT PLAN IS

AGE 60

LAST DAY OF THE SEMESTER

DURING WHICH HE ATTAINS AGE 60
IF BIRTHDAY IS OUTSIDE OF A
SEMESTER (SUMMER BREAK OR SEM
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SEC. 2: OPTIONAL OR
EARLY
RETIREMENT DATE

LAST DAY OF THE

SEMESTER AFTER HE HAS
RENDERED TWENTY (20)
YEARS OF CONTINUOUS
SERVICE; OR

IF THE LAST DAY OF THE

CEAP RETIREMENT FUND LECTURE
OF ATTY. ADA ABAD 092110

TH

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SEC. 3: SEPARATION
PRIOR TO
RETIREMENT

EMPLOYEE RESIGNS
EMPLOYEE IS TERMINATED
FOR REASONS OTHER THAN
DISMISSAL FOR CAUSE
ATTRIBUTABLE TO THE FAULT
OF MEMBER

(EXAMPLE: RETRENCHMENT, REDUNDANCY,

CEAP RETIREMENT FUND LECTURE
INSTALLATION
OF LABOR SAVING
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WHAT BENEFITS ARE THEY

ENTITLED TO?

RETURN OF TOTAL
CONTRIBUTIONS OF
EMPLOYEE

INCOME ACCRUED FROM HIS

CONTRIBUTIONS UNDER THE
TRUST FUND

SPECIFIED PROPORTION OF
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2. PARAMETERS FOR AVAILMENT OF

TAX EXEMPTION UNDER RA 4917

IF THE CBA OR RETIREMENT PLAN

GIVES A LOWER OPTIONAL RETIREMENT

AGE, PLUS SERVICE REQUIREMENT,
THEN SUCH WILL APPLY AS IT IS MORE
FAVORABLE TO THE EMPLOYEE.
IF COMPLIED WITH, BENEFITS ARE TAX-

EXEMPT SUBJECT TO THE FOLLOWING

CONDITIONS UNDER REP. ACT 4917
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3. REQUIREMENTS FOR TAX

EXEMPTION UNDER REPUBLIC

ACT NO. 4917

The benefit plan must be approved by the

BIR
The retiring official or employee must have
been in the service of the same employer for
at least ten (10) years
Not less than fifty (50) years of age at the
time of retirement
The retiring official or employee shall not
have previously availed of the privilege
under the retirement
CEAP RETIREMENTbenefit
FUND LECTURE plan of the
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OF ATTY. ADA ABAD 092110

HOW MUCH IS THE BENEFIT?

4.

IF THE RETIREMENT PLAN GIVES

BETTER RETIREMENT BENEFITS
THAN THE MINIMUM PROVIDED BY
LAW (1/2 MONTH EXPANDED),
THEN SUCH WILL APPLY AS IT IS
MORE
FAVORABLE
TO
THE
EMPLOYEE

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CEAP RETIREMENT FUND LECTURE

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RECONCILIATION
OF
TAX EXEMPTION
UNDER
RA 7641 AND RA
4917

PER BIR OPINION

CEAPDA-151-2004,
RETIREMENT FUND LECTURE March 31, 2004.
30
OF ATTY. ADA ABAD 092110

SITUATION ONE:
COMPANY DOES NOT

HAVE ANY
RETIREMENT PLAN
EMPLOYEE OPTS
FOR EARLY
RETIREMENT UNDER
REP. ACT NO. 7641, 60
YEARS PLUS AT LEAST
5 YEARS SERVICE
EFFECT: RETIREMENT BENEFIT IS TAXEXEMPT BY EXPRESS
PROVISION OF LAW.
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SITUATION TWO:
EMPLOYEE WILL RETIRE
UNDER COMPANY
RETIREMENT PLAN
COMPANY RETIREMENT
PLAN IS EQUAL TO OR
LESS THAN THAT
PROVIDED BY REP. ACT
NO. 7641
EFFECT: RETIREMENT BENEFIT IS TAX-EXEMPT
REGARDLESS OF WHETHER THE COMPANY
RETIREMENT PLAN IS REGISTERED WITH BIR OR
NOT.
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SITUATION THREE:
EMPLOYEE WILL RETIRE
UNDER COMPANY
RETIREMENT PLAN
COMPANY RETIREMENT
PLAN BENEFIT IS MORE
THAN THAT PROVIDED BY
REP. ACT NO. 7641
EFFECT: RETIREMENT BENEFIT WILL BE TAX-EXEMPT

PROVIDED THAT THE REQUIREMENTS UNDER

REPUBLIC ACT NO. 4917 ARE COMPLIED WITH
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REQUIREMENTS FOR TAX

EXEMPTION UNDER REP. ACT
NO. 4917
COMPANY RETIREMENT PLAN IS
REGISTERED WITH THE BIR
COMPANY RETIREMENT PLAN GIVES
BENEFIT WHICH IS BETTER THAN THAT
PROVIDED BY REP. ACT NO. 7641
EMPLOYEE MUST BE AT LEAST FIFTY (50) YEARS
OLD AND MUST HAVE SERVED THE COMPANY FOR AT
LEAST TEN (10) YEARS IN ORDER THAT HIS
RETIREMENT BENEFITS MAY BE TAX EXEMPT.
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This is but fair since it is clear that the

retirement benefit comes from the BIR
approved voluntary plan UNDER
REPUBLIC ACT 4917 and not from the
requirements of R.A. No. 7641.

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OF ATTY. ADA ABAD 092110

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SITUATION FOUR:
EMPLOYEE WILL RETIRE

UNDER COMPANY
RETIREMENT PLAN
COMPANY RETIREMENT
PLAN IS NOT REGISTERED
WITH THE BIR OR DOES NOT
COMPLY WITH 50-10
REQUIREMT OF RA 4917

EFFECT: TAX TREATMENT OF THE

RETIREMENT BENEFIT SHALL BE GOVERNED
UNDER REPUBLIC ACT NO. 7641. IF NOT
FALLING UNDERCEAP
EITHER,
NO
TAX EXEMPTION36
RETIREMENT FUND
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OF ATTY. ADA ABAD 092110

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R.A. NO. 7641 DOES NOT

APPLY WHEN THE PRIVATE
RETIREMENT PLAN GRANTS
TO THE RETIRING EMPLOYEE
MORE THAN WHAT THE LAW
GIVES.
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As the Supreme Court stated in the case of Oxales

vs. United Laboratories, Inc., G.R. No. 152991,
July 21, 2008:

R.A. No. 7641, otherwise known as The

Retirement Pay Law, only applies in a
situation where
(1)there is no collective bargaining agreement
or other applicable employment contract
providing for retirement benefits for an
employee; OR
(2) there is a collective bargaining agreement
or other applicable employment contract
providing for retirement benefits for an
employee, but itCEAP
isRETIREMENT
belowFUND
the
requirements set
LECTURE
39
OF ATTY. ADA ABAD 092110
for by law.

The reason for the first situation is to prevent

the absurd situation where an employee, who is
otherwise deserving, is denied retirement
benefits by the nefarious scheme of employers
in not providing for retirement benefits for their
employees.
The reason for the second situation is
expressed in the latin maxim pacta privata juri
publico derogare non possunt.
Private
contracts cannot derogate from the public law.
Ang kasunduang pribado ay hindi makasisira
sa batas publiko.
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FIVE REASONS SUPPORT

THIS CONCLUSION

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FIRST, A PLAIN READING OF THE

RETIREMENT PAY LAW.
Article 287 of the Labor Code: xxx In
the absence of a retirement plan or
agreement providing for retirement
benefits of employees in the
establishment, an employee upon reaching the age
of sixty (60) years or more, but not beyond sixty-five (65)
years which is hereby declared the compulsory retirement
age, who has served at least five (5) years in the said
establishment, may retire and shall be entitled to
retirement pay equivalent to at least one-half (1/2) month
salary for every year of service, a fraction of at least six (6)
months being considered as one whole year.

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SECOND, THE LEGISLATIVE HISTORY

OF THE RETIREMENT PAY LAW.
It may be recalled that R.A. No. 7641 traces back
its history in the case of Llora Motors, Inc. v.
Drilon.
In this case, the Court held that the then Article
287 of the Labor Code and its Implementing
Rules may not be the source of an employees
entitlement to retirement pay absent the
presence of a collective bargaining agreement or
voluntary company policy that provides for
retirement benefits
for the employee.
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THIRD, THE LEGISLATIVE INTENT OF

THE RETIREMENT PAY LAW.
A reading of the explanatory note of
Representative Alberto S. Veloso would
show why Congress sought to pass the
Retirement Pay Law: many employers
refused or neglected to adopt a retirement
plan for their employees because of the
absence of any legal compulsion for them to
do so.
so
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FOURTH, THE TITLE OF THE

RETIREMENT PAY LAW.
The complete title of R.A. No. 7641 is An Act
Amending Article 287 of Presidential Decree
No. 442, As Amended, Otherwise Known as
the Labor Code of the Philippines, BY
PROVIDING FOR RETIREMENT PAY TO
QUALIFIED PRIVATE SECTOR IN THE
ABSENCE OF ANY RETIREMENT PLAN IN
THE ESTABLISHMENT.
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Res ipsa loquitur.

The thing speaks for
itself.
Isang bagay na
nangungusap na sa
kanyang sarili.

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FIFTH, JURISPRUDENCE.
In Oro Enterprises, Inc. v. National Labor
Relations Commission, the Court held that R.A.
No. 7641 is undoubtedly a social legislation.
The law has been enacted as a labor protection
measure and as a curative statute that absent a
retirement plan devised by, an agreement with, or
a voluntary grant from, an employer can
respond, in part at least, to the financial wellbeing of workers during their twilight years soon
following their life of labor.
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CEAP RETIREMENT FUND LECTURE

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SECTION 60(B) OF THE NIRC

GOVERNS EXEMPTION FROM THE
INCOME TAX OF THE EARNINGS
DERIVED FROM INVESTMENTS OF
THE EMPLOYEES RETIREMENT
FUND.

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GENERAL RULE:
INCOME OF THE TRUST FUND FROM ITS
INVESTMENTS IS EXEMPT FROM
INCOME TAX
EXCEPTION:
Interest income and/or yield from the bank
deposits and deposit substitutes of the trust
fund which is subject to the 20% final
withholding tax. (Secs. 24 [B] and 60 [A]) Source: Hector De Leon,
National Internal Revenue Code Annotated, 2003
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RETIREMENT TRUST FUNDS

ARE TAX-EXEMPT IF
CONDITIONS ARE FOLLOWED:
(1) contributions are made to the trust by such employer, or employees,
or both for the purpose of distributing to such employees the earnings
and principal of the fund accumulated by the trust in accordance with
such plan; and
(2) \per specific provision of the trust fund agreement that at any time
prior to the satisfaction of all liabilities with respect to employees under
the trust, it will be impossible for any part of the corpus or income to be
used for, or diverted to, purposes other than for the exclusive benefit of
his employees provided that any amount actually distributed to any
employee or distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by such
employee or distributee.

Source: Tax exemption of Employees' Trust Fund by Lesley Noreen G.

Lato,
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OF ATTY. ADA ABAD 092110

http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/WS965B_20-

TAX
IMPLICATION
ON EARLY
RETIREMENT
BENEFITS

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IN CASE OF CONFLICT BETWEEN THE TAX

CODE AND THE RETIREMENT PLAN RULES
AND REGULATIONS, THE LATTER PREVAILS.
Section 32(B)(6)(a) merely provides for minimum
requirement [e.g., 50 years of age plus 10 service years]
for tax exemption.
The Retirement Plan Rules and Regulations of the
company may provide that the normal retirement date or
early/optional retirement date be more than what is
required by the Tax Code. Consequently, in case of conflict
between the Tax Code and the Retirement Plan Rules and
Regulations, it is the latter that should prevail. (BIR No.
052-2000, October 30, 2000)
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SEPARATION BENEFIT IS A
DISTINCT EXCLUSION FROM
THE RETIREMENT.
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In
case
of
a
corporation providing
for early retirement
program
to
their
employees, one should
determine if such was
a retirement plan or a
separation/retrenchme
nt program.
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IF part of retirement plan,

there is a need to go through
the requirements provided in
the Tax Code or the retirement
plan in order to be tax exempt.
IF it is simply a separation or
retrenchment
program,
it
should satisfy requirement
under Section 32 (B) (6) (b), -separation for causes beyond
control of the employee.
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IF EMPLOYEE OF TEN YEARS

SERVICE RESIGNS UNDER
CEAP RETIREMENT PLAN, IS
THIS TAX-EXEMPT?
SINCE THIS IS NOT
RETIREMENT, AND NEITHER IS
IT A SEPARATION DUE TO
DEATH, SICKNESS OR
PHYSICAL DISABILITY, OR
AUTHORIZED CAUSE FOR
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RA 4917, Section 1. Any provision

of law to the contrary
notwithstanding, the RETIREMENT
BENEFITS received by officials and
employees of private firms, whether
individual or corporate, in accordance
with a reasonable private benefit
plan maintained by the employer
shall be exempt from all taxes, XXX;
Provided, That the retiring official or employee
has been in the service of the same employer for

at least ten (10) years and is not

less than fifty years of age at the
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Provided, further, That the benefits

granted under this Act shall be availed of
by an official or employee only once:
Provided, finally, That in case of
separation of an official or employee
from the service of the employer due
to death, sickness or other

physical disability or for any

cause beyond the control of the
said official or employee, any
amount received by him or by his heirs from the
CEAP RETIREMENT FUND of
LECTURE
employer as a consequence
such separation
OF ATTY. ADA ABAD 092110

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WHAT IS THE
RECKONING
PERIOD FOR
PURPOSES OF
COMPUTATION
OF BENEFITS?

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In reckoning the length of service, the

period of employment with the same
employer before the effectivity date of
the law on January 7, 1993 should be
included. (Guidelines for the Effective
Implementation of R.A. 7641, The Retirement Pay
Law, 24 October 1996)

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The minimum length of service in an

establishment or with an employer of
at least five (5) years required for the
entitlement to retirement pay shall
include authorized absences and
vacations, regular holidays and
mandatory fulfillment of a military or
civic duty (Section 4, Rules
Implementing the New Retirement Law)

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ARE ALLOWANCES,
COMMISSIONS AND
OTHER BENEFITS
INCLUDED IN THE
COMPUTATION OF
THE RETIREMENT
BENEFITS?
GENERAL RULE: THESE
ARE EXCLUDED.
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IF THE COMPANY PLAN

PROVIDES FOR ITS EXCLUSION,
THEN IT IS EXCLUDED. (Oxales vs.
United Laboratories, Inc., G.R. No. 152991, July
21, 2008)

IF THE COMPANY PLAN OR CBA

PROVIDES FOR ITS INCLUSION,
THEN THE ALLOWANCES,
COMMISSIONS AND OTHER
BENEFITS ARE INCLUDED.
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THANK YOU
VERY MUCH
FOR THE
OPPORTUNITY
TO BE OF
SERVICE TO
YOU.
HAVE A GOOD
EVENING!

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OF ATTY. ADA ABAD 092110

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