Capital-forming payments: what the employer pays, transfers and reports on the payslip

The payslip of Ms Yilmaz, an administrator at a trades business, shows a line she never sees in her bank account: 40 € of capital-forming payments, of which the employer bears 20 € under the collective agreement while 20 € comes out of her own salary. Both amounts go straight to a fund company, and yet both are taxed and subject to contributions. Why, and what must the business watch?

A cash payment that never reaches the current account

The Fifth Capital Formation Act, the 5. VermBG, opens with a plain statement of purpose. It promotes wealth building by employees through capital-forming payments that employers have agreed to make. The Act therefore creates no claim to money of its own; it governs what happens to a payment once it has been agreed.

Under section 2(1), capital-forming payments are cash payments that the employer invests on behalf of the employee. The key word is invests. The business does not pay the amount out to the worker; it passes it on to an institution with which an eligible contract exists.

In practice Germans simply say VL. On the payslip the amount appears twice: once as earnings that raise gross pay, and once as a deduction from net pay, because the money is forwarded rather than paid out. The two lines belong together, and neither of them is an arithmetic slip.

Who counts as an employee under the Act? Section 1(2) names manual workers and salaried staff, expressly including apprentices. Homeworkers are treated as employees too. For civil servants, judges, career soldiers and fixed-term soldiers, subsection 4 orders that the rules apply accordingly.

Subsection 3 excludes the members of the body that legally represents a legal person, for instance the managing director of a GmbH or the management board of an AG. The same holds for persons appointed to represent a partnership or other association. For them the Act does not apply at all.

For a small business this means that a promise made to all staff does not automatically cover the shareholder managing director. If the GmbH nevertheless pays an amount into a savings contract for him, that is ordinary employment income without any support under this Act.

The investment forms of section 2

The list in section 2(1) is exhaustive and split into eight numbered items. Whatever falls outside it is not a capital-forming payment, whatever the contract is called. In practice four groups are enough, because the savings bonus and the lock-up period later depend on them.

• Equity holdings and securities (items 1 to 3): securities savings contracts under section 4, securities purchase contracts under section 5, participation contracts and participation purchase contracts under sections 6 and 7
• Building society saving (item 4): expenditure under the Housing Construction Premium Act, without the conditions for the premium itself having to be met
• Home construction (item 5): expenditure on building, buying, extending or enlarging a residential building or a flat located in Germany, including the repayment of obligations linked to it
• Savings contract with a credit institution under section 8 and endowment insurance under section 9 (items 6 and 7), plus item 8 for certain continuing membership obligations

The fund savings plan, today the most widespread form, sits in the first group. Letter c admits units of investment funds only where shares make up at least 60 percent of the fund's assets. The yardstick is the annual report for the penultimate financial year before the year in which the contract is concluded.

A bond fund, or a mixed fund with a lower share ratio, therefore does not fit this form. For newly launched funds a transitional rule applies: in their first two financial years the first annual or half-yearly report after launch is what counts.

Item 1 also allows holdings in the employer's own business: shares, convertible and profit-participating bonds, profit participation certificates, a stake in the employer GmbH, a silent partnership, a secured loan or a profit participation right. For the forms in letters g to l within the own business, section 12 sentence 3 requires the employer's consent.

Anyone who invests in the employing business carries a double risk: the job and the savings sit with the same debtor. Section 2(5a) therefore obliges the employer, before such an investment, to agree with the employee on arrangements that protect it if the employer becomes insolvent during the lock-up period.

The home construction form under item 5 has a limit of its own. It is excluded where a third party offers a ready-made scheme in which the employee can invest together with more than 15 other employees. In addition, the money must be applied directly to the project concerned.

On whose behalf the money may be invested

The money need not land in a contract held by the employee personally. Section 3(1) allows investment in favour of a spouse or civil partner who is not permanently separated, and in favour of children who, at the start of the year, had not yet completed their 17th year of age or who were born during that year.

Conversely, the parents may benefit where the employee is still a child meeting that age condition. An apprentice aged sixteen can therefore direct the payments into a contract held by his mother. Investment for relatives is excluded, however, for contracts under sections 5 to 7.

The contracts in sections 5 to 7 are securities purchase contracts and participation contracts, which under section 3(2) may also be concluded directly with the employer. They remain reserved for the employee personally. A fund savings plan or a building society contract in the child's name is allowed.

The beneficiary changes nothing on the payslip. The payment remains the employee's wage and is taxed and charged to contributions in his hands, even when it ends up in the wife's or the child's contract. All the business needs is the correct account details and the flag.

Where the payment comes from: an agreement or the employee's own wage

There is no statutory right to an employer top-up. Section 10(1) lists where capital-forming payments can be agreed: in the employment contract, a works agreement, a collective agreement or a binding determination for homeworkers. The amount follows solely from that agreement.

A business bound by a collective agreement therefore checks the relevant agreement first. Subsection 5 lets it credit against the agreed payments any company welfare benefits already provided as capital-forming payments in the same calendar year. It does not have to pay twice.

The second source is the employee's own wage. Under section 11(1), the employer must, on written request, conclude a contract for investing parts of the wage in capital-forming form. Under subsection 2 these wage portions are capital-forming payments too, with the same consequences for the savings bonus and the lock-up period.

Where the wage portions are to be transferred separately from other payments, the business is only obliged to sign if the employee asks for constant monthly amounts of at least 13 euros. For quarterly amounts, or a single investment once a year, the floor is 39 euros.

For the single annual investment the employer may set a fixed date in the year, subject to co-determination by the works council, and must announce it afresh each year. Outside that date a single investment remains possible from the December wage or from Christmas and year-end bonuses.

Once per calendar year the employee may demand in writing that the contract be cancelled, reduced or increased. After a cancellation the business need not sign a new contract in the same year. Collective agreements and works agreements may depart from these details.

A further brake sits in section 11(3) sentence 2. Someone investing wage portions in monthly amounts can switch the type of investment or the institution during the running year only with the employer's consent. Payroll should not have to maintain new recipients every month.

How free is the choice of provider? Section 12 makes it a condition of any support: the employee must be free to choose both the type of investment and the provider. A collective agreement may merely restrict investment to the supported forms of items 1 to 5, not to one particular bank.

Wages in the full sense: tax and social insurance

The most important payroll rule is in section 2(6). Capital-forming payments are taxable receipts within the meaning of the Income Tax Act and, at the same time, remuneration for social insurance and unemployment insurance purposes. The Act grants no allowance for them.

If the employer pays the amount on top, it raises gross pay, and wage tax, solidarity surcharge, church tax where applicable, and contributions fall on it. The employee thus receives less than the top-up in net terms, while the full amount arrives in her contract.

If, instead, the amount comes out of her own wage under section 11, gross pay does not change at all. The wage portion was already taxable and subject to contributions; it is merely forwarded instead of paid out. Wage portions are therefore no way of saving charges, unlike salary conversion into a company pension.

Company pensions follow their own rules, with exemptions from tax and contributions up to certain limits; the course on occupational pensions covers them. Here the difference is enough: capital-forming payments are charged in full straight away, and the only support comes through the bonus in the next module.

Section 2(6) sentence 2 settles an edge case that arises with low pay. If the wage left after deducting the capital-forming payment is not enough to withhold tax and contributions, the employee must pay the missing amount to the employer. The investment enjoys no priority over the deductions.

Subsection 7 adds the employment-law angle. Capital-forming payments form part of the wage or salary. The claim to the payment is also non-transferable, so a creditor of the employee cannot have it assigned to himself.

Transfer, flag, be liable: the employer's duties

Section 3(2) sets the payment route. The employer transfers the amount directly to the company or institution where it is invested and flags it as a capital-forming payment. The institution in turn flags the eligible amounts and the type of investment.

If the institution finds that a payment does not, or no longer, meet the statutory conditions, it must tell the employer in writing without delay. That is how the business learns that a contract has been terminated or changed, and it can adjust the transfer.

Home construction under item 5 is the exception. If the employee produces a written confirmation from his creditor that the investment meets the conditions, the employer transfers the amount to the employee himself on request. The employer does not have to check whether the confirmation is correct.

If the employer, the institution or the creditor breaches its duties, section 15(3) makes it liable for any savings bonus wrongly paid, not reclaimed or not withheld as a result. A wrongly flagged transfer is therefore more than a cosmetic flaw.

When in doubt there are two routes. Under section 15(4), the tax office responsible for taxing the business gives information on request on how the rules apply. And under subsection 5, the office in charge of wage tax audits may check that these duties have been met.