Insights · Tax & accounting

When the employee also pays part of the premium: payroll deduction, declaration, non-payment and tax

At one point, a group programme often splits in two: the company pays for the basic package, but the employee asks, at their own expense, for a family member to be included or for a higher level. As a broker, I see that the cover side is simple in such cases – the insurer adds the family member to the list and quotes the premium – but within the company four questions remain open: how the premium share gets from the employee to the company, what the employee should sign, what happens if they do not pay, and how the split premium is taxed. This article goes through these four questions; the cover rules for including family members are discussed in the article on family member extension.

In short:
  • The employee's share of the premium can be deducted from net pay with the employee's consent – in practice, by a written declaration – up to the portion of wages exempt from deductions (Section 161 of the Hungarian Labour Code, Mt.); towards the insurer, the company as policyholder remains responsible for the full premium.
  • The declaration should set out what the consent covers, the amount of the premium share and what happens if there is nothing to deduct it from – the consequence of non-payment is typically the removal of the family member or the supplementary level, not the termination of the whole contract.
  • Tax: the part paid by the company is, as a group premium, a certain specified benefit (a Hungarian employer-taxed benefit category); the part reimbursed by the employee is not a benefit and is not taxable – but a premium “converted” from gross pay remains the company's benefit.

One contract, two wallets

In a group contract, the policyholder is the company, and it pays the premium to the insurer – in a single sum, for the entire circle of insured persons. Hungarian collective policy conditions define the policyholder as the party who makes the proposal and undertakes to pay the premium; in the insurer's eyes, the employee is an insured person, not a premium payer. In practice, therefore, “the employee also pays” does not mean that the employee transfers money to the insurer, but that the company pays the full premium and recovers the employee's share from the employee – typically by deducting it from net pay. A less common but existing solution is for the employee to transfer the money to the company's bank account; this is harder to administer, because late payments have to be followed up separately. The essence of the arrangement is the same in both cases: towards the insurer, the policyholder is responsible; the claim against the employee is the company's internal matter.

Deduction from pay: only with consent, only up to the limit

Under Section 161(1) of the Hungarian Labour Code (Act I of 2012, Mt.), deductions from wages may be made on the basis of legislation or – up to the portion of wages exempt from deductions – an enforceable decision; under paragraph (2), the employer may deduct its own claim on the basis of the employee's consent, up to the portion of wages exempt from deductions, and also where the claim arises from an advance payment. The employee's share of the insurance premium is a claim of the company against the employee, so deducting it requires the employee's consent, and the deduction may not reach into the portion of wages exempt from deductions, which Section 162 of the Mt. defines by reference to the rules on judicial enforcement. Two practical consequences follow. First: it is advisable to ask for consent in writing, in a separate declaration rather than in a half-sentence of the employment contract, because the employee can withdraw it, and the company then needs to know what the next step is. Second: the deduction is made from net, taxed pay, and it must appear in the pay statement required by Section 155 of the Mt. with its legal title and amount, so that the employee can check it. It is a different case if part of the gross wage is “swapped” for insurance in such a way that the wage is reduced in the payroll and the company pays the premium – that is no longer an employee contribution but a benefit from the company, taxed differently; more on this below.

The declaration: seven points that must not be missing

The employee's declaration has to speak to the insurer and to payroll at the same time. In Hungarian practice, it contains the following elements:

The declaration can sit alongside the internal FAQ, and it is also worth recording in the benefits policy that the premium for the optional element is borne by the employee.

If the employee does not pay: three levels, three consequences

The first level is the relationship between the insurer and the company. Under Section 6:449 of the Ptk., if the premium due is not paid, the insurer sends a written request for payment, warning of the consequences and setting a 30-day grace period counted from the sending of the reminder; if the grace period expires without payment, the contract terminates with retroactive effect to the due date, and the policyholder may request in writing, within 120 days of termination, that cover be reinstated. This rule applies to the whole group contract, not to a single employee: if the company does not pay the full premium because a few employee shares are missing, it puts the cover of the entire team at risk. The company should therefore never make its own share of the premium dependent on employee payments; the article on premium payment in practice discusses this in more detail.

The second level is the relationship between the company and the employee. Arrears are the company's claim; they can be deducted only within the limits of the consent and recovered under the rules of employment law. In Hungarian practice, companies therefore typically do not extend credit: the declaration states that an unpaid premium share leads to the removal of the family member or the supplementary level with the following month's list. The third level is the cover. The insurer pays only for what occurs, while the contract is in force, as an insured event under the contract; there is no cover for a family member who has been removed, and on re-enrolment the waiting period may start again under the policy conditions. The monthly routine of adding and removing people is described in the article on joiners and leavers.

Tax: which forint belongs to whom?

The part paid by the company is the group premium, which Hungarian practice treats as a certain specified benefit (a Hungarian employer-taxed benefit category): the taxable insurance premium under Section 3 point 89 of the Personal Income Tax Act (Szja tv.) – if the premium attributable to the individual cannot be determined even by apportionment (Section 3 point 89 sub-point bb) – is taxed at the payer under Section 70(6)(b) of the Szja tv., with 15% personal income tax and 13% social contribution tax on 1.18 times the premium, 33.04% in total. The part reimbursed by the employee is not a benefit from the company: the employee pays it out of net pay that has already been taxed, so no new taxable event arises there, and at the company the accounts treat this part as a settlement (reimbursement) item. Two things are worth watching. If the company pays the full premium and the employee does not reimburse it, the family member's premium is also a benefit from the company; and if the “contribution” is in fact a reduction in gross pay in exchange for the premium, the premium remains the company's benefit and the pay is lower – that is the cafeteria logic, not an employee contribution. Because premium shares are shown per individual, it is also worth discussing with the accountant whether the company's part still behaves as a group premium or whether the contract breaks down into per-employee premiums – this is covered in the article on per-employee premiums.

What should the company do before introducing it?

First, decide what is the company's share and what is the employee's, and put this in the benefits policy. Second, prepare the declaration with the seven points above, and ask payroll to run the legal title of the deduction on a separate line. Third, set down the rule for non-payment – typically removal from the following month – and keep paying your own share of the premium every month, independently of employee payments. Fourth, confirm the tax treatment with your accountant, especially for the family member premium. If you let me know, I build the premium for the optional element and the method of adding and removing people into the offer table; and in communication with employees, say it simply: what is the company's gift, the company pays and pays tax on; what is the employee's choice, the employee pays out of net pay, and if they do not pay, the chosen element ends.

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Sources

This article is for information purposes only; it contains general information and does not constitute an offer or insurance advice. The exact content of insurance contracts is defined by the insurers' terms and conditions in force. Deductions from pay and the tax treatment of premium shares are questions of employment law and tax; the specific solution should be settled with the company's accountant and, where necessary, an employment lawyer.

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