When KiwiSaver was set up in 2007, the legislation provided the facility for employers to become exempt from the auto-enrolment provisions. To become exempt, employers had to provide a superannuation scheme as an alternative or supplement to KiwiSaver, that met certain minimum requirements.  The alternative scheme was either a stand-alone trust, or an arrangement through a master trust, such as SuperLife, the alternative arrangements had to that exist prior to 6 October 2009. No new employers can get exempt status.

“Exempt” in this context does not mean that the employer is exempt KiwiSaver.  It means that the employer is exempt from the employee auto-enrolment requirements of KiwiSaver.

It is important to recognise that an employee does not have to join the exempt scheme; it just needs to be available when the employee starts work.

 

Implication of exempt status

The main reason for having exempt status is to help the employer manage the KiwiSaver compliance obligations.  Exempt status removes the need to automatically enrol new employees in KiwiSaver.  Exempt status shifts KiwiSaver from a compulsory opt-out regime, to a voluntary opt-in regime.  Therefore, if an employer has exempt status:

  • The employer is not required to hand the “IRD KiwiSaver pack” to each new employee, when they first join service.  Instead, it must give the employee the equivalent details for the alternative scheme.  This does not stop an employee:
    • already a KiwiSaver member, from continuing their contributions, or
    • not a KiwiSaver member, from choosing to join KiwiSaver.
  • The employer will not need to advise the IRD, for KiwiSaver purposes, that the employee has started work.
  • The employer does not have to deduct the compulsory minimum 3% contribution from the employee’s pay from the first pay day.  This will save the employer significant reconciliation work for employees who choose to opt-out, as soon as they can.  The same applies to the employer contributions.

However, if an employee is already a KiwiSaver member, the employer must still deduct contributions, pay the employer subsidy and forward the net amount to the IRD.  This will apply until the employee goes on a contributions holiday.  Also, any employee, not a KiwiSaver member, can still choose to join KiwiSaver.  They just will not be auto-enrolled.  The employer will then be obliged to administer the required KiwiSaver deductions.

The alternative scheme is not an “approved” KiwiSaver scheme.  Therefore unless the alternative scheme is also a “complying fund”:

  • The government does not pay the member the $1 for $2 member tax credit subsidy. 

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Should an exempt employer continue to be exempt?

As with all employee benefit decisions, to justify having an exempt scheme, there must be a recruitment, retention or employee management advantage or it has to reduce the employer’s costs.  This has to be more than the advantages from having non-exempt status or operating no scheme at all.

The key advantage of maintaining exempt status is the removal of the need to deduct KiwiSaver contributions from a new employee’s first pay day, i.e. until the employee has decided whether or not to opt-out.  This will avoid significant payroll reconciliation issues and will be an advantage to an employee who intends to opt-out.  It will also eliminate the risk that the employer fails to act on an opt-out request.  It will therefore reduce the work load of payroll staff. 

Avoiding the auto-enrolment provision will also benefit employees, as it will mean that they can make a conscious decision, in their own time, whether or not to join KiwiSaver.

Whatever decision the employer makes about having exempt status, it should also put in place a policy to actively encourage employees to make a decision on KiwiSaver, i.e. to facilitate employees who wish to opt out, to opt-out and ensure that those who wish to contribute, understand the rules.  The auto-enrolment procedure assumes what constitutes “appropriate” behaviour, and that is not a good HR strategy.

 

Requirements for the alternative scheme & exempt status

The alternative scheme must be a registered superannuation scheme (a stand-alone scheme or through a master trust) that applied before 6 October 2009. It must have the following features:

  1. Be open to all permanent employees, including part-time employees, who are age 18 or over and under age 65.
  2. Eligible employees must be able to join immediately on starting employment.
  3. Employees must be able to transfer their other superannuation benefits to the scheme.
  4. The total contributions (member and maximum employer rate) must be at least 4% of total gross base taxable income if it is a defined contribution scheme. For defined benefit schemes, the scheme’s actuary must certify that the value of the benefits accruing in each year is at least equivalent to the 4% minimum.
  5. Any employer’s contributions that form part of the 4% minimum, must vest over a period of 5 years or less.
  6. On becoming entitled to a benefit (e.g. on leaving service) members must be able to transfer their benefit to another registered scheme or to a KiwiSaver scheme. Benefits do not however have to be locked up until age 65.

An employer can satisfy the exempt status by the use of more than one scheme and by the use of a master trust.

To become exempt, an employer had to apply to the Financial Markets Authority. An employer needed to satisfy the Financial Markets Authority that it complied with the requirements. The employer may also need to show that it continues to meet the requirements each year. The Financial Markets Authority will maintain a register of exempt employers.

If the exempt employer ceases to comply with the requirements, the Financial Markets Authority or the employer can apply for the employer to be removed from the exempt register.

To become exempt, an employer had to apply to the Financial Markets Authority. An employer needed to satisfy the Financial Markets Authority that it complied with the requirements. The employer may also need to show that it continues to meet the requirements each year. The Financial Markets Authority will maintain a register of exempt employers.

If the exempt employer ceases to comply with the requirements, the Financial Markets Authority or the employer can apply for the employer to be removed from the exempt register.

 

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