Japan Passes Defined Contribution Pension Legislation

Washington, DC, July 16, 2001 - The Japanese Diet passed on June 22 significant defined contribution (DC) pension legislation. The new law allows Japanese companies to adopt DC plans (company plans) similar to 401(k) plans in the United States. The new law also allows individuals who are either self-employed, or employed but not covered by any pension plan at work, to make contributions to plans (individual plans) similar to those available in the United States. The legislation takes effect on October 1, 2001.

The legislation includes the following features.

Contributions-Company Plans
Unlike U.S. 401(k) plans, contributions to the company plans must be made entirely by the employer up to the contribution limits. The contribution limits depend on whether the employer has an existing defined benefit pension plan. If the employer has a defined benefit (DB) plan, contributions are limited to ¥216,000 (about $1,718) per year. If the employer does not have a DB plan, the contribution limit doubles to ¥432,000 (about $3,436) per year.

Contributions-Individual Plans
Self-employed individuals may contribute up to ¥816,000 (about $6,491) per year to individual plans. Individuals who are not covered by either a DB or a DC plan at their company may contribute up to ¥180,000 (about $1,432) per year to an individual plan.

Investments
Plan administrators select the investment options for company plans. Plans must include at least three investment options. Although not reflected in the Embassy of Japan's summary, the new law appears to require one of the investment options to have a principal-guarantee feature. Investment options may include mutual funds and investment trusts, as well as savings products, government bonds, equities, and insurance products. Real property, real estate, financial futures and commodity futures are not permissible investment options. Plan administrators must provide information about the plan and investment options to participants and must permit participants to change investments at least once every three months.

Distributions
Individuals who have participated in a plan for more than ten years are eligible for distributions at age 60. The eligible age for distributions increases on a sliding scale to 65 for individuals who have participated in a plan for less than ten years. Participants who die or are severely disabled are eligible to receive distributions regardless of their age. Distributions may be made in the form of an annuity or a lump-sum payment. If a participant participates in the plan for less than three years, contributions must be lump sum.

Tax Incentives
Contributions. Contributions to plans are tax exempt. For company plans, the employer receives the deduction (as a loss) equal to the contributions that it made on behalf of its employees to their plans. For individual plans, contributions are deductible from individual income.

Accumulation. It is unclear whether a tax will be imposed on pension assets during the accumulation phase. It appears that amounts accumulated in a plan will be subject to a "special corporate tax" equal to 1.173 percent. However, this special corporate tax appears to have been suspended until March 2003, and that it is possible that that suspension could be extended beyond that date.

Distribution. Although distributions are taxable, no tax is owed on pension distributions (all distributions from DC plans, DB plans, and the national pension system) that total less than a standard amount.

Portability
For employees whose job tenure is more than three years, company plan account are fully portable. These individuals can roll over their plan assets to their new employer's DC plan or the national pension fund. Similarly, individual plan assets may be rolled over to an employer's DC plan.

Fiduciary Responsibilities
The new law outlines the fiduciary responsibilities of the employer, trustee (i.e., custodian), plan administrator, and the National Pension Fund Association (with respect to individual plans).

Conversion of Existing DB Plans
The law allows employers to convert existing DB plans to DC plans with the agreement of employees. Conversions are subject to limitations not described by the summary provided by the Embassy of Japan.

These provisions will be implemented through regulations promulgated by the Ministry of Health, Labor, and Welfare later this summer.