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Converting a cash bonus - moment of choice is key

17 Feb 2020

When rewarding their employees with a cash bonus, companies are often confronted with a heavy tax burden and a large discrepancy between the total employer cost and the final amount the employee receives net in hand. In the everlasting quest for talent, looking for alternatives to the traditional cash bonus may be crucial. Fortunately, many interesting alternatives exist.

Alternative rewards

It is a well-known fact that awarding a traditional cash bonus to employees can be a costly endeavour for both the employer and the employee. In Belgium, a cash bonus will be subject to standard income taxes (i.e. 53.50% to be borne by the employee) and to social security contributions (+/- 27.50% and 13.07% to be borne by the employer and by the employee, respectively). As such, even with a gross cash bonus of a considerable amount, employees may be disillusioned with the actual amount they receive net in hand. Also for the employer, an additional cost, i.e. employer social security contributions being due, is to be factored in. Consequently, the gap between the spendable income received by the employee and the total cost for the employer is significant.

Fortunately, alternatives exist. Some of these alternatives may offer the employer and its employees a tax and/or cost saving, thus ensuring a higher net-in-hand value (e.g. warrants or stock options), while other forms of rewarding may offer the employee additional flexibility and freedom (e.g. flex reward plans). However, when implementing these alternative rewards, both the employer and the employee should tread carefully if they don’t want to risk losing the benefits of the conversion.

Note that, although we’ll be discussing the scenario of the conversion of a cash bonus, the same principles apply to the conversion of any form of remuneration into a benefit with a more beneficial social security treatment. However, with every type of remuneration for which the possibility for conversion is considered, it should first be verified whether - from a labour law point of view - the benefit can be (partly) converted. In this respect, the hierarchy of norms embedded in Belgian labour law should be kept in mind (e.g. a year-end premium that has been introduced at industry level and does not provide for the possibility of conversion cannot be converted at the level of the individual employment relationship).

Moment of conversion

When converting a cash bonus into an alternative with a more beneficial social security treatment, it is crucial to have the conversion - more specifically the choice the employee makes to opt for an alternative - take place at the right moment in time. 

Belgian social security contributions will be due on every benefit that meets the conditions of the notion of ‘salary’, as mentioned in Article 2 of the Belgian Wage Protection Act of 12 April 1965. Article 2 defines salary as every benefit, either in cash or quantifiable in cash, to which the employee is entitled as a result of the employment relationship and for which the employer is liable. As soon as the employee can invoke an acquired right to a benefit, the latter will qualify as ‘salary’, and social security contributions will be due on it.

If the employee and the employer agree that the employee can choose to have e.g. the performance bonus paid out in cash - on which social security contributions are due - or to have it converted into a benefit that is excluded from the notion of ‘salary’ and on which no social security contributions are due (e.g. warrants meeting the legal conditions) or into a benefit that follows an entirely different social security treatment (e.g. a more luxurious company car), this choice will have to be made and communicated before the employee holds an acquired, enforceable and unconditional right to the cash bonus. 

It will thus be important to identify the moment on which an acquired, enforceable and unconditional right to the cash bonus comes into existence, as this will be the tipping point for the social security treatment: 

  • if the choice of conversion is made before this moment, the benefit into which the cash bonus is converted will follow its own social security treatment (e.g. rules for company cars, warrants, stock options, group insurance etc.);

  • if the choice of conversion is made after this moment, the benefit into which the cash bonus is converted will, regardless of its own social security treatment, still be treated as a cash bonus for social security purposes, and employer and employee social security contributions will be due. The parties will thus lose the social security benefit of the conversion.

Acquired right

As mentioned above, the latest possible moment of conversion is inherently linked to the question “When does an acquired, enforceable and unconditional right to a benefit come into existence?”.

With respect to the payment of a cash bonus, the NSSO (“ONSS”/“RSZ”) holds the position that the right becomes acquired and enforceable as from the moment an individual quantifiable bonus allocation has been made. 

When exactly the individual quantifiable bonus allocation is made in turn heavily depends on the specifics of a given bonus plan. 

In the event of a purely discretionary bonus, the individual bonus allocation will only take place on the moment the employer decides to grant a bonus payment and decides on the actual amount of the bonus. Up until that time, employees will thus in principle be able to choose to convert their future discretionary bonus into an alternative benefit. In some cases, it can even be argued that the window for conversion in such a scenario extends to the moment in time when the actual amount of the bonus is communicated to the employees. 

However, where a performance bonus is tied to meeting clearly defined KPIs during a reference year, the outcome can be different. In such a scenario, it could be argued that the employee is gradually building up an acquired right to a quantifiable bonus payment during the reference year. If the parties want to make sure that the employee can convert the entire performance bonus into an alternative benefit, the choice for conversion should preferably be made as soon as possible in the reference year and before the end of it.

A lot of bonus schemes contain mixed discretionary and performance-linked elements, and the above examples clearly show that, when one considers the possibility of converting a cash bonus, the specifics of the bonus plan should be examined in detail in order to determine the ultimate time when the choice for an alternative can be made.

We therefore recommend employers to provide for a system that makes sure that employees make a final choice for an alternative before they have an acquired right. If no choice is made in time, the bonus will be paid out in cash, and standard social security contributions will be due.

Conclusion

Rewarding your employees with a traditional cash bonus may not always be the least expensive or most optimal way, and conversion into cheaper or more flexible alternatives is certainly an option worth considering. However, it will be important to define, on the basis of the specifics of the bonus plan, the precise moment before which a choice has to be made. 

If you are looking for more guidance on this topic, don’t hesitate to contact one of our PwC Legal experts.

Contact us

Pascale Moreau

Pascale Moreau

Partner, PwC Legal BV/SRL

Tel: +32 479 90 02 76

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