France’s reform on defined benefits stems from the European Union (EU) Directive 2014/50/UE of April 16, 2014, which aims to lift any restriction to freedom of work within the EU.
The French directive improves the acquisition of supplemental pension rights for employees and preserves their plan rights when they change employers.
From July 2019 onwards, newly set-up ‘defined benefit’ retirement plans, commonly referred in France as ‘Article 39’ plans:
- Cannot maintain the rule that beneficiaries finish their career in the company that enrolled them in the plan.
- Are now ‘portable’ because acquired rights are transferable to any other supplemental plan within another employer.
AN ADDITIONAL ORDINANCE
Furthermore, the French government has drafted an ordinance that is in line with the Action Plan for Business Growth and Transformation (PACTE) Law (which is not yet in effect). The ordinance:
- Eliminates the condition that beneficiaries end their career in the same company that first enrolled them in the plan.
- Gives the possibility to provide for a condition that the beneficiary be present in the company and/or the duration of the contribution period, up to three years.
- Offers the possibility to provide an age requirement, but no more than 21 years.
- Says the rights acquired will be transferable to any other supplemental retirement plan or shall remain vested with the beneficiary.
For retirements that meet the above conditions, the draft ordinance envisages a specific social security regime featuring a flat employer contribution of 29.7% (on its contributions into the plan) and a beneficiary charge of either 7% or 14% (on annuities) if the following criteria are also met:
- The retirement benefits are expressed as an annuity.
- The supplemental rights, acquired each year and expressed as a percentage of the remuneration of the beneficiary, exceed neither 3% per year nor 30% in total, all employers combined (versus 45% provided by the Afep-Medef recommendation).
- The employer notifies each year via the DSN (electronic payroll filing sent to the social security administration) the identity of the beneficiaries and the amount of benefits acquired for each of them.
- All the employees of the company benefit from a PERCO or a defined-contribution retirement plan.
The French government has six months as from the date of effect of the PACTE Law (which can only occur after the Constitutional Council has ruled upon it, assuming it is petitioned to do so), to issue the announced measures, which is likely to be at the end of 2019.
WHAT HAPPENS TO EXISTING PLANS?
Conditional defined benefit plans that have ceased accepting new subscribers as from May 20, 2014, and that have remained closed, may continue to generate new rights under such plans after the entry into effect of the ordinance.
For other existing plans, however, it will not be possible to accept new subscribers and no new supplemental right can be generated as from the date of entry into effect of the ordinance.
Going forward it will be possible for businesses that so wish, and who have either not opted to pay the contribution on the annuity, or who have decided before the end of 2019 not to pay it, to transfer the current regimes to a defined benefits plan that satisfies the new conditions or to a defined contribution plan (that is collective and obligatory).
The amounts thus transferred shall not be subject, for the beneficiary, to income tax for the year of the transfer and shall be deducible from taxable revenue.
What is still unclear at this stage is the accounting treatment of these plan transformations. They do not stem from the PACTE law but from IAS 19 and FAS 87/132. Industry experts expect clarification as well as a finance ministry opinion (BOFIC) to clarify those points.