Under KiwiSaver, employers must subsidise their employees’ savings. To avoid “double dipping”, exceptions apply in respect of employees in pre-May 2007 superannuation arrangements.
Employer contribution rate
The compulsory employer contribution rate is 3% of the employee’s total taxable pay. Employers can contribute above this level on a voluntary basis.
An employee’s total taxable pay includes overtime, allowances, holiday pay, etc. Basically, all “remuneration” subject to the PAYE tax system. It does not include redundancy pay.
The compulsory employer contributions apply to all employees, including part- time, temporary and casual employees, who are members of KiwiSaver, who are currently saving through the PAYE tax system. The exceptions are employees under age 18 and employees who are age 65 or, over if they have been in KiwiSaver for at least 5 years. If they have not been in KiwiSaver for at least 5 years, employers must continue to contribute in respect of an employee over 65, if the employee chooses to continue to save.
If an employee is not saving through the PAYE system (for example they are on a savings suspension) the employer does not have to contribute.
Employer superannuation contribution tax (ESCT)
All employer contributions are subject to ESCT.
If an employer contributes to an “existing scheme” for an “existing employee”, they do not need to also contribute to KiwiSaver. The employer contribution must be above the required minimum employer KiwiSaver contribution level and it must vest in the employee within 5 years. This is known as “no-double-dipping”.
The Existing Scheme must have started before 17 May 2007.
For this purpose an “existing employee” includes employees who started employment before 1 April 2008 and for whom the employer had agreed with the employee before 1 April 2008 to make contributions, even if the employee did not join the scheme until after 1 April 2008. It will be important that there is proof of an agreement.
For new employees (i.e. employees hired after 1 April 2008), the same exemption does not apply. For these employees the rules of any existing scheme will need to be changed or KiwiSaver will need to be paid on top, to avoid double payments. It will be a simple exercise, in most cases, to define the contributions to the existing scheme for new employees as “x% less what the employer pays to KiwiSaver (for those members who belong to KiwiSaver)”.
If an employee goes on a savings suspension, the required employer contribution also stops. Employees can go on a savings suspension at any time after 1 year at their option, by advising the IRD, using the IRD KS6 form or doing it online. If they suffer significant financial hardship before the end of 1 year’s membership, they can apply to the IRD for a savings suspension in the first year.
From 1 April 2019, a savings suspension is for 1 year after which the employee must apply again or re-start contributions.
Unless an employer operates an alternative scheme that qualifies the employer for “exempt employer status”, it must auto-enrol every new permanent employee (aged 18 to 64; full-time or part-time), when they first start work. This applies even if the employee intends to opt-out.
For auto-enrolled employees, savings, including compulsory employer contributions, start from the first pay day.
When an auto-enrolled employee opts out, the employer will receive a refund of its contributions.
If the employer has exempt employer status, auto-enrolment and opt-out reconciliation issues do not apply. This is because employees only join if they opt-in.
Key KiwiSaver decisions for employers
In respect of KiwiSaver and the required employer contributions, key decisions include:
- What is the cost to the employer if all employees join?
- Can the payroll system handle the calculation of employer contributions?
- Should the employer pay contributions on top of current remuneration, or look to build them into total remuneration?
- What are the principles behind the employer’s decisions? Knowing these will provide a clear framework to address future changes to the legislation.