Legislation concerning pension insurance for shareholders in limited liability companies has changed. As of 1 January 2014, if you own more than 30 per cent of a company in which you hold a management position and are currently insured as an employee under your company’s TyEL insurance, you are required to transfer to YEL insurance.
According to Christel Wedenberg, an insurance specialist at Veritas Pension Insurance, the transfer will not affect your pension accrual provided that your YEL income is equal to, at a minimum, the amount of your salary. This also ensures the level of any other social security benefits you might receive.
“In fact, entrepreneurs have the opportunity to improve their pension level as well as the security they receive when encountering illness or unemployment and during parental leaves. As a self-employed person, you can independently affect the level of your YEL income. As an employee, social security is strictly based on the salary paid to you, and there are no other options," Wedenberg explains.
An appropriate YEL income level is essential
When you take YEL insurance, you can determine your own income level. Your future pension and social security are based on the amount of your YEL income. Wedenberg states that a good starting point, when making the shift from employee to self-employed person, is an income that corresponds to no less than your previous salary level. YEL income is, however, not the same thing as the company’s financial result, let alone the turnover, but rather, it is an indication of the value of the work input of the self-employed person.
“If a self-employed person works in several limited liability companies, in which he/she owns more than 30 per cent and holds a management position, his/her YEL income is the combined work input in all of these companies. If the share of ownership in any one of the companies falls below this limit, it is not included in the income calculation," Wedenberg advises.
Although the YEL income begins to immediately affect your pension accrual and unemployment security, its effect on other benefits, when transferring from employee to entrepreneur, may be delayed by up to two years.
“If you apply, for example, for a sickness allowance in 2014, the amount calculation will be based on the earnings confirmed in your 2012 taxation. However, if your current earnings, meaning your YEL income as a self-employed person, is 20 per cent higher during the six months prior to your having become ill, then you can apply for the allowance as based on your current earnings."
Payments are tax deductible – with a 22 per cent discount for new entrepreneurs
Your YEL insurance contributions are also based on your YEL income. The 2013 contribution is about 23 per cent of the YEL income. If you are now taking YEL insurance for the first time, you will receive a 22 per cent discount for the first four years.
“The payment percentage for self-employed persons may sound high, but in reality, the contribution payable for an employee is nearly the same, as it is comprised of the employee’s share and the employer’s share. Self-employed persons, on the other hand, can choose whether they make the YEL contributions themselves or whether they are paid through their company,” Wedenberg states.
“This choice will also have an impact on taxation, since the YEL contributions are 100 per cent tax deductible for the one paying them. If self-employed persons pay the contributions themselves, they also have the option to deduct these payments from their spouse’s taxation.”
When the YEL insurance takes effect, the shareholder should be removed from the insured listed under the company’s TyEL policy, so that there will be no overlapping payments. It would also be good to remember that once the YEL insurance has taken effect, the shareholder’s salary shall be paid in full without deducting the employee share of the pension contribution.