Shanghai, Dec. 9 2013 – The government of China announced its new tax incentive on Enterprise Annuity (thereafter referred as ‘EA’) on 6 December, 2013, the nation’s qualified supplemental retirement plan. The new regulation, which reduces the Individual Income Tax (IIT) to a large degree by using a tax deferral mechanism, is expected to be effective on 1st of January, 2014.

Aon Hewitt, the global human resources business of Aon plc (NYSE:AON), observes that the new regulations represent the only tax benefit for Chinese employees. “It is time for employers to reconsider their total rewards strategy, especially how they can maximize the total rewards returns to employees,” said Sun Fan, Global Partner of Aon Hewitt.

Some newly announced key regulations by the PRC include:

• Employer contribution: Tax exempt, defined by earlier EA requirement as the contribution percentage dependent on plan design, caps the employer’s total contribution up to 8.33% of the previous year’s total salary;
• Employee contribution: Tax exempt within 4% of the employee’s previous year’s  salary, capped at three times the City Average Salary;
• Investment income: Tax exempt on capital gains;
• Benefits withdrawal: Tax is paid when plan participants reach retirement age. Their monthly withdrawal will be added to taxable income and subject to Individual Income Tax*. The IIT will be withheld by the plan trustee.
• Current implementers of EA: For companies that currently implements the Enterprise Annuity, employees’ past contribution, for which the relevant tax has been paid for, will not be taxed again.

Based on Aon Hewitt’s 2013 Human Capital Intelligence Survey, China’s average salary increase is 8.5%, with only 23.2% of the Chinese companies having established a supplemental retirement plan. The new regulations may alleviate the current situation where “cash is the king” in China, and push employers to consider talent attraction and retention from a total rewards perspective. One that includes overall benefits, retirement and taxation.

According to Sun Fan, Global Partner of Aon Hewitt, “The Enterprise Annuity experienced a slow development since its debut in 2006 - one of the key reasons being a lack of tax incentive. This new tax relief is expected to boost development of the EA market. For an employee with monthly income of RMB 12,000, with an EA plan that collects a contribution of 8% on the employer side and a contribution of 4% on the employee side, his or her tax deferred pension contribution will be 12% (RMB1,440). When tax is paid upon withdrawal at retirement, tax savings will be generated due to the lower tax bracket used.”

Sun Fan also suggests to HR professionals that “the adjusted EA plan looks more like a Chinese version of the 401(k) plan. Like all other qualified plans, EA carries restrictions on plan design and implementation - such as plan eligibility (which must be open to all employees), compulsory employees contribution, union and local labor bureau-approved plan features, no benefits withdrawal before retirement, etc. Employers are advised to choose the appropriate supplemental retirement vehicles based on their rewards strategy and philosophy. “

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Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com

About Aon

Aon plc (NYSE: AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United. 

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