If the company sets aside a fixed annual budget for benefits on top of salary, two instruments come up time and again: group life, accident and health insurance, and employer contributions to a voluntary fund (önkéntes pénztár – a voluntary mutual pension, health or self-help fund). The two compete for the same budget, yet they do something quite different with the employee's money: one covers risk, the other finances savings or health spending – and since 2019 their taxation has also run on separate tracks. As a broker, I see that the decision often depends not on knowledge of the two instruments but on habit. This article does not rank them – the two instruments are not substitutes for each other – but brings together the criteria by which you can decide, for your own team, which one to use when, and when to use both.
- Group insurance covers risk: the insurer pays the amount set in the contract if an insured event occurs; a fund contribution is savings or a health budget that builds up on the employee's individual account and belongs to the employee.
- Taxation differs: according to the guidance of NAV (the Hungarian tax authority), since 1 January 2019 the employer's contribution to a voluntary fund has been taxed as the employee's income under their legal relationship, while the group insurance premium is, as a main rule, also the employee's income, and only under a genuine group contract with an undivided premium – where the part of the premium attributable to one insured person cannot be determined even by apportionment – can it be a “specific defined benefit” whose tax burden falls on the company.
- It is not either-or: insurance closes the risk gap, the fund serves the long-term goal – the right question is what your team needs first, and how much budget is available for it.
What does each of them do with the money?
Group insurance is a risk product: the company, as the policyholder, pays a premium, and if an event defined in the contract happens to an insured employee – a bone fracture, hospital treatment, surgery, a critical illness, permanent impairment of health, death – the insurer pays the amount set in the policy to the employee or to the beneficiary. If nothing happens in a given year, the premium has been “used up”: this is not a loss but the price of belonging to a risk pool. The insurer pays only for what is an insured event under your contract, and the exclusions and waiting periods also apply – the cover-map article explains this.
With a voluntary fund contribution, the company, as an employer member under Section 12 of the Funds Act (Act XCVI of 1993 on Voluntary Mutual Insurance Funds, Öpt.), takes over all or part of the employee's obligation to pay membership fees: the money goes to the employee's individual account and remains theirs. The type of fund determines what the money can be used for: Section 10 of the Öpt. recognises pension funds, health funds, self-help funds, and combined health and self-help funds. A pension fund account is long-term savings, while a health and self-help fund account can be used for the health and social expenses defined by law.
Taxation: two separate tracks since 2019
For years, the employer's contribution to a voluntary fund was a benefit taxed with preferential public charges. According to the guidance of NAV (the Hungarian tax authority) on the tax rules for fund payments in force from 1 January 2019, from that date the employer's contribution is the individual's income under their legal relationship: in an employment relationship it is taxed as wages – the employee pays personal income tax and, under the rules in force, social security contribution, while the company pays social contribution tax. On the employee's side, however, the option under Section 44/A of the Personal Income Tax Act (Szja tv.) to direct part of their tax to the fund after fund payments has remained: in their tax return, the employee can ask for a specified percentage of the payments – up to the statutory ceiling – to be credited to their fund account, and the employer's contribution taxed as income may also count towards this; it is worth confirming the details with your accountant. A different treatment applies to an employer payment for a targeted service under Section 12/A of the Öpt., which goes not to the employee's individual account but to a separate reserve of the fund – its tax treatment also has to be clarified with your accountant.
The group insurance premium is not tax-free either. Under Section 3 point 89 of the Personal Income Tax Act, if the part of the premium attributable to the insured person can be determined – even proportionally – it is the employee's income under their legal relationship and is therefore taxed as wages; only under a genuine group contract with an undivided premium, where the part of the premium attributable to one insured person cannot be determined even by apportionment, does the premium become a “specific defined benefit” (egyes meghatározott juttatás) under Section 70 (6) point b), whose total public charges are borne by the company and amount to 33.04% at the current rates. Which of the two applies to your own arrangement depends on how the contract's premium is calculated – this is the subject of the article on separate premiums and wage income, while the summary on group insurance taxation gives the basic picture. On the payout side, under point 6.6 of Annex 1 to the Personal Income Tax Act, the benefit from risk insurance under contracts concluded after 2018 is typically tax-free; on the fund side, withdrawing money from a pension fund account before the end of the waiting period, or other than as a pension benefit, may be taxable.
Access: when can the employee use the money?
With insurance the answer is simple: when the insured event occurs and the claim has been reported to the insurer – the amount under the contract is then due regardless of how much premium has been paid up to that point. A new joiner is entitled to the full sum insured once the waiting period has passed, even if the company has so far paid only a few months' premium for them. A fund account, by contrast, is worth as much as has accumulated on it: in a pension fund, the member has no access to their account balance – apart from the pension benefit that can be claimed on reaching retirement age – before the end of the waiting period counted from joining under Section 2 of the Öpt. (for pension funds the Act sets this at ten years), and even afterwards only in accordance with the fund's statutes and the tax rules; in a health and self-help fund, use is limited to the range of services defined by law, but it is typically not tied to a waiting period. Under Section 13 (3) of the Öpt., the member's creditors cannot lay claim to the amount held on the member's account, and the savings also survive a change of job: fund membership belongs to the employee, not to the company. Group cover, on the other hand, typically ends with the employment relationship. The sister site, egeszseg.biz, writes about how a health fund compares with health insurance.
What suits whom: headcount, age, existing benefits
In a team exposed to physical risk – construction, manufacturing, transport – accident cover is tangible: the amount paid for a bone fracture or for days in hospital is what people tell each other about on the shop floor; here the value of a fund contribution becomes noticeable more slowly. With an older age profile, pension fund savings are the more attractive option, and critical illness or hospital cover also gains in value; for a team of career starters the pension goal is distant, whereas accident and health cover relate to everyday life. Where a cafeteria (flexible benefits) scheme is already running, it is worth looking at what employees actually use – a separate article covers the relationship between cafeteria and group insurance.
The scope for differentiation also differs. Under Section 12 (3) of the Öpt., the employer's contribution must be the same amount, or the same percentage of wages, for every employee who is a fund member; under subsection (4), a deviation from this is possible only in favour of employees who will reach retirement age within fifteen years, by age group, at a rate increasing with age. In group insurance, the insured group and the level of cover can be structured according to objective criteria – job, position, organisational unit; the rules for this are described in the article on planning budgets and cover levels. The size of the budget also matters: as a broker, I see that the per-person share of a group risk premium is typically smaller than a noticeable monthly fund contribution, so on a small budget insurance provides a noticeable benefit sooner.
Combined: not either-or, but a sequence
The two instruments are not competitors; they answer two different questions: “what happens to my family if something happens to me?” – this is what insurance is for; “what happens when I retire, or if I have to pay a medical bill?” – this is what the fund is for. Many companies therefore introduce the two in stages: from a smaller budget they first introduce basic group cover, because it pays a large amount relative to its premium in the event of a serious misfortune, and then, if the budget grows, they supplement it with a fund contribution. It also works the other way round: where there has been a fund contribution for years, accident and critical illness cover can close the gap that the savings do not cover. The comparison of a pay rise and a group benefit takes the same logic further, towards wages. In terms of administration, a fund contribution involves an employer agreement with the fund, the employees' fund membership and a monthly transfer; group insurance involves one contract and regular updating of the headcount list – typically monthly, depending on the conditions.
What should you do before deciding? Write down in one sentence what the purpose of the benefit is – retention, protection, long-term provision – and how much budget is available for it per head. Look at the age profile and the job roles: they show whether the risk side or the savings side matters more first. Ask your accountant to calculate, for your own arrangement, the total cost of both instruments to the company and their net value to the employee – NAV's guidance and the legal provisions cited above provide a starting point for this. If you let me know about the group side, I will prepare the comparison of the quotes; the fund side is governed by the employer agreement and statutes of the chosen fund, and the tax question is settled by your accountant.
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Sources
- Öpt. (Act XCVI of 1993 on Voluntary Mutual Insurance Funds) – Section 2 (4) c) waiting period, Section 10 (1) types of fund, Section 12 employer member and employer contribution, Section 12/A targeted service, Section 13 (3) protection of the individual account
- NAV (Hungarian tax authority) – Guidance on the changes, effective from 1 January 2019, to the rules on tax obligations relating to payments into voluntary mutual insurance funds and to fund benefits
- Personal Income Tax Act (Szja tv., Act CXVII of 1995) – Section 3 point 89 subpoint b), Section 70 (6) point b) (group insurance premium, proportional allocation, specific defined benefit), Section 44/A (directing tax to a voluntary fund after fund payments), Annex 1 point 6.6
- NAV (Hungarian tax authority) – Taxable insurance premium (guidance, 14 May 2020): the premium of a genuine group risk insurance with an undivided premium is a specific defined benefit; a premium that can be determined per insured person is income under the legal relationship
