There is a very important change from 1 January 2019 regarding the contributions payable by employees who are pensioners drawing a direct pension. The essence of the change is that starting from this year, employees who are pensioners drawing a direct pension will not have to pay contributions, and their employers will not have to pay the social contribution tax. In this article we summarise the essence of the new regulation.
Who are deemed pensioners drawing a direct pension?
Firstly, in order to apply the new Hungarian regulation properly it has to be specified who can be considered a pensioner drawing a direct pension from the perspective of social security.
According to Section 4 f) of Act LXXX of 1997 on the Eligibility for Social Security Benefits and Private Pensions and the Funding for These Services (hereinafter: the “Social Security Benefits Act”) pensioners drawing a direct pension are people who:
- by applying the Act on Social Security Pension Benefits (Act LXXXI of 1997) and an international treaty, draw a direct pension as defined in Section 14 (3) a) (old-age pension), disability pension aid (in pension), a pension from an ecclesiastical entity or an increased old-age/disability allowance,
- by applying EU regulations on the coordination of social security systems and the implementation thereof, and the legal regulations of the EEA, receive an old-age pension,
- qualify as pensioners drawing a direct pension according to the previous two paragraphs, and according to the Hungarian Labour Code are employed even if payment of the pension is suspended.
Based on the above definition, pensioners drawing a direct pension are essentially people who have reached retirement age and people drawing the preferential pension for women.
The following people do not qualify as pensioners drawing a direct pension:
- those whose pension was not disbursed as a pension from 1 January 2012 but as a pre-retirement benefit or service allowance;
- those for whom a pre-retirement benefit or service allowance was determined after 31 December 2011,
- those whose disability or accident-related disability pension is disbursed from 1 January 2012 as a rehabilitation or invalidity benefit, or their benefit for a reduced capacity to work was determined from this date.
When are pensioners drawing a direct pension exempt from paying contributions?
Based on Section 25 of the Social Security Benefits Act “pensioners drawing a direct pension who are employed (excluding those employed according to the Hungarian Labour Code and qualifying as pensioners drawing a direct pension) shall pay an in-kind health insurance contribution and a pension contribution on their income underlying the contribution base. If disbursement of the pension is suspended, employed pensioners drawing a direct pension shall pay a health insurance contribution in cash.”
So based on the above Hungarian law, pensioners drawing a direct pension who are employed according to the Hungarian Labour Code and qualify as employees will not have to pay the 10% pension contribution and the 4% in-kind health insurance contribution on their income in 2019. It also means that pensioners drawing a direct pension who work based on an employment contract only have to pay the personal income tax (15%).
So in 2019, pensioners drawing a direct pension, who are employed according to the Hungarian Labour Code, will not be entitled to healthcare services as employees, but will be entitled based on Section 16 (1) b) of the Social Security Benefits Act as domestic pensioners covered by the central budget.
It is very important that the exemption from contributions and the lack of insurance will only be permitted if the pensioners drawing a direct pension earn money under an employment framework. Pensioners drawing a direct pension who work in a public service type job, or work under an engagement contract for example, will continue to be insured based on their legal status, and on the basis of this activity they will have to pay a health insurance contribution and a pension insurance contribution.
One important consequence of this change is that due to the lack of contribution payment the 0.5% pension increase shall not be applicable to pensioners drawing a direct pension.
Task for employers in connection with change in rules
According to Section 3.2 of Schedule 1 to Act CL of 2017 on Rules of Taxation, employers have to report the end of the insured status of the people affected to the National Tax and Customs Administration within eight days on form no. T1041.
Our article does not fully cover the regulation on the contribution payments of employees who are pensioners drawing a direct pension, it only tries to outline the most significant changes. Feel free to contact our payroll staff if you have any specific questions regarding the amended act.