[Updated Feb 8, 2023] Germany, like other countries, is facing a serious demographic crisis, specifically impacting the government-implemented “pay-as-you-go” pension system, creating a major need for supplementation. As a result, employees in Germany place great importance on their pension plan because the state pension alone is not sufficient. In turn, this is why offering company pension benefits is the most popular supplemental benefit in the country.
A German employee’s supplemental benefits package comprising traditional benefits, i.e., pension, life, and disability, will cost approximately 4%-5% of their annual base salary.
The statutory employee benefits in Germany, required by the German government, include retirement, unemployment insurance, healthcare, long-term nursing care, and workers’ compensation. In addition to this, it is common to see employers place supplemental benefits, especially in competitive industries. Common supplementary employee benefits in Germany include retirement, life insurance, and lump-sum disability. Additionally, fringe benefits or perks that are popular to offer include company cars, job bikes, transportation allowances, childcare, gym memberships, and lunch vouchers.
Mandatory Employee Benefits in Germany
Financing retirement is the biggest concern for employees, as the state pension amounts continue to decrease and the retirement age increases. Every employer is required, by law, to transfer minimum contributions into the state pension system for both the employer and employee.
Contributions to the state pension do not accumulate into a cash-backed fund on behalf of the employee but are paid from current income from pension insurance by means of an allocation process (a pay-as-you-go system). The monthly gross normal retirement pension amount is approximately €1,620 based on 45 yrs. of contribution and average income. Early retirement is possible from age 63, albeit with a reduction of 0.3% per month. Due to changes in the pension law, pension payments are now subject to tax. This is applied on a gradual basis for pensions already being paid to avoid undue hardship for the pensioners.
The maximum normal gross monthly retirement pension amounts to approximately €3,000. This is, however, a theoretical figure as it is almost unachievable.
In general, every person who is in employment is automatically and mandatorily insured against unemployment in Germany. However, there are exceptions, for example, people employed under mini job regulations or government employees, as these positions have their own regulatory system. Benefits are payable from the first day of unemployment due to involuntary termination (dismissal), and after 12 weeks for voluntary termination (resignation), provided the unemployed person has been employed for at least 12 months during the previous 30 months.
The benefit amounts to 60% of net earnings in the last 12 months or 67% if there are children. The duration of payment also depends on the length of the period during which contributions have been paid and on the claimant’s age. The benefit is paid for a minimum of six months to a maximum of 12 months and up to the age of 50. The benefit is payable up to 24 months if the beneficiary is above the age of 50. After this period, the benefit continues at a reduced rate of about €502 per month, with an additional children allowance which varies depending on the child’s age. This benefit is tax-free.
Everyone working or residing in Germany is obliged to have health insurance. 90% of people in Germany have public health insurance as the plans mandated by the government provide a broad spectrum of excellent services. These include inpatient and outpatient benefits, prescription drugs, vision and dental services, pre and antenatal care, as well as pediatric care. (This Asinta article outlines German maternity benefits in greater detail.) Public health insurance is also popular because unemployed spouses and children under 25 are co-insured at no additional cost. Healthcare contributions are shared equally between the employer and the employee and are deducted through payroll. Private insurance is available for individuals earning more than the threshold prescribed by the government annually (€5,550 per month in 2023). However, this is all handled privately and NOT via an employer-sponsored benefit, even though these benefits are funded through payroll. Unlike public health insurance, unemployed spouses and children must pay individual premiums for private health insurance.
Long-Term / Nursing Care
In Germany, this employee benefit is mandatory for all members of the country’s public health insurance program. Employees who are members of a private health insurance scheme are required to purchase coverage for long-term care. Benefits include home and long-term inpatient care, depending on the level of care required. This benefit is tax-free.
In Germany, any new business with employees must register with the Social Accident Insurance, i.e., Workers Compensation Fund, regardless of whether the company has a registered office or a branch in Germany. This insurance covers all employees against occupational accidents, i.e., on-the-job accidents, accidents on business trips, accidents on the way to and from work, and occupational illnesses. Employers, self-employed persons, freelancers, and persons of similar status are not insured.
In Germany, statutory accident insurance as part of employee benefits, covers all work-related incidents. This generally applies to employees who are on business travels abroad, as long as their stay abroad is within the pre-determined business travel timelines before their departure. For longer or unlimited business travels abroad, companies are recommended to clarify the situation with their fund and possibly take out additional accident insurance.
Supplementary Employee Benefits
Due to Germany’s complex employment laws, setting up employee benefits can be complicated. Employee protection laws require that all staff be treated in a non-discriminatory manner so that all employees are equal, irrespective of gender and/or disability. contracts are a critical component of benefits regulations and must be proofed and executed by skilled German employment lawyers.
In addition, it is crucial to be aware of the demographics, needs, and preferences of the workforce before implementing new benefits. Perks are only effective if the added value is attainable and matches the employees’ desires. Profion can help design benefit plans which suit our clients’ wishes, are within their budgets, and meet or exceed industry standards. This is especially true in highly competitive industries with a high demand for talent.
It is important to note that some benefits and perks can be offered tax-free, while others are subject to a tax liability for the employee, meaning some perks are considered a benefit-in-kind. As with legal advice, Profion is not in a position to provide tax advice. We therefore strongly recommend working closely with a tax advisor in Germany during the decision-making process. This not only ensures compliance with German tax laws but also ensures that the intended perks are designed in a way that is most valuable for the employees and is aligned with your company’s philosophy.
Retirement plans are based on defined contribution or so-called hybrid defined-contribution approaches. Contribution rates range between 2% and 10% of pensionable pay (typically defined as annual base gross salary), depending on the industry, company size, and the employee’s hierarchical level. Matching contribution plans are often designed as 1:1 or 1:1⁄2 matches with a maximum employer contribution according to the given employer contribution limit. Retirement benefits can be in the form of an annuity or as a retirement lump sum, normally paid out at age 67. Benefits are subject to income tax for the employee upon payment. Contributions to a pension plan are tax-deductible.
From January 1, 2018, the legal vesting period was reduced from five to three years; however, immediate or contractual vesting after one or two years of plan membership is common. For salary sacrifice arrangements, benefit entitlements are immediately vested. Both part- and full-time employees may join a pension plan. A six-month waiting period is sometimes a precondition; however, very few employers have such requirements.
Benefits usually amount to twice the pensionable pay or a fixed amount that is paid as a lump sum to the employee’s survivors. Life insurance benefits are subject to income tax for the beneficiaries upon payout. Premiums paid to cover the life insurance benefits are tax-deductible.
Total Permanent Disability
Most occupational supplementary plans provide long-term disability (LTD) or total permanent disability (TPD) benefits. The TPD benefit is usually a lump sum and is typically twice the pensionable pay, while the LTD benefit is an annuity at 20% of pensionable pay on average. The LTD annuity is payable until recovery or completion of service at the normal retirement age or death, whichever occurs first. LTD/TPD benefits are subject to income tax for the employee upon payout. Premiums for LTD/TPD benefits are tax-deductible.
Accidental Death and Dismemberment Insurance (AD&D)
In addition to the above-mentioned employee benefits, AD&D programs are quite common in Germany. These cover death or occupational disability risks only if the incident is caused by an accident (sudden, involuntary, or external incident). Typical AD&D programs offer worldwide 24-hour coverage. The benefit level is often equal to the life insurance or long-term disability benefit amounts. Accidental death and dismemberment benefits are normally funded via local AD&D insurance, and the insurance premiums are fully tax-deductible.
As mentioned above in the paragraph on healthcare benefits, health insurance is mandatory in Germany and is typically handled by the employee. If an employee earns less than €66,600 per year, they are obliged to take out public health insurance. If they earn more than this amount, they can voluntarily take out public health insurance, or they can take out private health insurance. All benefits are at a very high level, and the insurances cover inpatient as well as outpatient treatments, vision, and dental benefits, as well as prescription drugs. For this reason, the employer does not typically provide any supplemental health benefits.
Moreover, in the case of illness, and where an employee has been employed for at least four weeks, the employer is required to continue paying at 100% for the first six weeks of illness. From the 7th week, the employer’s obligation to continue to pay this benefit ceases and the respective state sickness fund takes over the payment of the sickness benefit. This benefit then amounts to 70% of the gross pay. Especially in competitive industries, employers might top up the sickness benefit to 100% of the employee’s actual net income for 6 months on average.
This is rarely provided in Germany as an added employee benefit, as both public and private health insurance funds provide dental benefits. Dental insurance is a taxable benefit. Here again, employers in competitive industries might offer an annual budget for extended dental benefits to their employees on average amounting to €600.
Computer Glasses Computer or screen glasses are special visual aids for working on a computer screen. In principle, the employer bears the costs of these glasses. The employer has to offer employees who work at computer screens preventive care before they start their work, during their work, and in the event of visual problems. Employees must be provided with special visual aids if normal visual aids are not sufficient.
Fringe Benefits (Perks)
Fringe benefits, i.e., additional non-insured benefits, also known as perks, are becoming more important as part of a company’s overall benefits offer. They are an essential incentive for not only attracting but also retaining highly qualified personnel. Fringe benefits go far beyond remuneration and, if used skillfully, can sustainably strengthen employees’ motivation and loyalty to the company.
As fringe benefits are strictly regulated in Germany, and there are certain maximum limits for offering the benefit in a tax-optimized way (in general, €50 per employee per month), the freedom of designing a benefits package is limited.
In light of the pandemic, employees’ health and well-being have become the number one priority for companies everywhere. Thus, many additional and new benefits focusing on mental and physical health have been introduced. Nowadays, these also comprise financial and even digital well-being.
Compared to other countries, in Germany, professional and personal matters are generally separated. Therefore, benefits such as an Employee Assistance Program (EAP), mental health helplines, or therapy/counseling services offered by employers are not commonly used by employees. Moreover, statutory health insurance covers comprehensive services in this area, so such offers from the employer may be seen as superfluous.
Due to job losses and reduced working hours because of COVID-19, many people suffered financial instability. As a result, a lot of employees in Germany strongly agree that employers should take more responsibility for their financial security and, therefore, should increase their benefits portfolio concerning financial well-being.
In general, physical wellness is covered by mandatory health insurance. Since 2020, employers can, in addition to salary, spend tax-free amounts of up to €600 per employee and year for health promotion. Eligible health measures are those that are listed in the Prevention guideline of the Federal Associations of Health Insurance Funds. A typical benefit in this area would be health check-ups that go beyond the scope of the statutory health insurance system.
Employers can support employees with various software programs and training sessions on how digital technologies should be used correctly. This ensures that employees feel comfortable in their digital working environment and are made aware of potential threats.
Vacation / Special Leave
In Germany, the majority of companies provide 30 days of vacation to all employees, irrespective of status or seniority. This contrasts starkly with the statutory requirement of just 20 days (based on a five-day week). Since a healthy work-life balance is becoming increasingly important for German employees, offering special leave is usually perceived as a very valuable benefit, especially by younger employees.
Flexible Work Arrangements
Flexible working hours, a special leave policy, and the opportunity to work from home at least 1 – 2 days a week are common trends to ensure a healthy work-life balance. In addition to that, working from anywhere (workcation) is popular but must be within the strict tax and labor law regulations.
Job Tickets / Company Cars / Allowances
Employers can pay an allowance for public transportation or provide a job ticket (bus or train pass) and in certain instances, this is tax-free. Employers generally offer either a vehicle or a car allowance to executive management, sales, and technical support staff. The trend, however, is to offer an allowance rather than a vehicle. There is no limit on the allowance as it is treated and taxed like salary.
In 2023, employees may receive a maximum of €6.90 per lunch voucher. Of this €6.90, the employer pays €3.10, and the employee must pay the remaining €3.80 to be exempt from tax and social security contributions. Lunch vouchers may only be issued on workdays when the employee is actually present. Issuing 15 monthly vouchers per employee exempts employees from providing proof of actual presence, regardless of illness, vacation, and any other days absent. For each meal, one lunch voucher is used as payment.
Provided that the tax-free threshold of €50 per employee per month has not been exhausted by other non-cash benefits, employers can make use of it to subsidize gym memberships. The gym membership can either be paid directly to the gym, or employees can be provided with vouchers / prepaid cards that they can use in various gyms throughout Germany. One option is that the employer concludes a contract with a gym of their choice. This not only allows the employer to pay a defined monthly amount directly into the employees’ membership accounts at the respective gym but usually also enables the employer to negotiate discounted rates for their employees. Depending on the gym, this might require a minimum headcount. Should the monthly membership fees exceed €50 (or whichever amount is still available for non-cash benefits), the remaining costs would be paid privately by the employee. Another option is to offer a voucher / prepaid card specifically intended for health and wellness benefits. Employers can top-up the prepaid card or provide vouchers up to 50 €tax-free.
Employee Product Discounts
Employees are granted discounts on either their own company’s products or any other products and services. Such discounts are a popular low-cost benefit that can range from shopping discounts to discounted hairdresser rates up to discounted insurance premiums.
Gifts for Special and Personal Occasions
These perks include birthdays, jubilees, weddings, or the birth of a baby. Employers can either hand out a bought gift or a prepaid gift card. Gifts or vouchers up to €60 are tax-free per occasion.
Free Snacks & Beverages in the Office
Ranging from fresh fruit, candy, cereal, and/or baked goods to coffee, fruit juices, water, or even alcoholic beverages.
The employer enters a framework agreement with a provider of choice and can then lease bikes to employees. The most common approach is the employee-financed model, where the employee picks a bike and takes over the leasing rates via salary sacrifice. The employer can also participate financially or fully take over the bike leasing rate (employer paid). This, however, is not common practice in Germany. As of January 1st, 2019, company bikes are taxed at 0.25% via salary sacrifice. Exceptions may apply for certain e-bikes.
In contrast to the deduction of childcare costs (2/3 of the costs, max. €4,000 per year) in the tax return, the tax exemption of employer subsidies is generally not limited in amount. This means, for example, that even high costs for childcare in exclusive privately organized facilities can be reimbursed fully tax-free.