The funds in the provident funds for employees are accumulated by dividing them into their components: the compensation component and the rewards component, to which are added investment profits. The redemption values of executive insurance policies are determined today in Section 46 of the Income Tax Regulations (Rules for Approval and Management of Provident Funds) 1964. There have been changes in the accrual calculation over the years, at different stages. To simplify things, I will not detail the date of each stage and the nature of the change it introduced In calculating the funds, I will limit myself to a general explanation. To these funds are added today (from the beginning of the 2000s) investment profits.

In the past, there was no such clear division: amounts used to be deducted from the compensation component in the old policies when calculating the redemption values (a 10% deduction to finance the risk component - risk, as allowed by the regulations at that time). For the purpose of fulfilling the employer's obligation to pay severance compensation, the redemption value of the compensation in the policies is calculated based on the premiums paid for this component, plus linkage differences only. For the purpose of reporting to the income tax, 10% was deducted as mentioned. The result was a significant benefit to the employee - both by deducting part of the funds for tax purposes, and by adding only linkage differences without interest (which was guaranteed to the insurance companies according to the old HAZ agreements that guaranteed them special fixed interest bonds - Fund A to Fund X). The accumulated difference was transferred to the part of the rewards which was then entirely exempt from tax.

In the early 90s of the last century, the Income Tax Commission decided to cancel the method of calculating the redemption value of compensation. According to her order, two definitions for the value of compensation were included in the executive insurance policies: compensation for the employer and - compensation for the income tax). The calculation for income tax purposes was less convenient for the employee, meaning the amount calculated was higher than the revenue value for the employer who calculates by deducting amounts as explained above.

Some of the employers did not lose from this procedure, since they signed an agreement with the employee that received the approval of the Minister of Labor (today the Minister of Labor) in an order according to Section 14 of the Law on Severance Compensation, exempting the employer from further payment of compensation regardless of the redemption value of the compensation in the policy. Procedure Obtaining such an exemption has also undergone changes, and today it is possible to obtain such an exemption without the need to obtain approval by order of the Minister of Labor, but by signing an agreement in accordance with the general approval under Section 14 of the Law on Severance Compensation, which includes all the conditions set forth in the said approval. The text of the said general approval is attached to the agreement as an appendix. Both parties benefited from the settlement - the employer was released from the obligation to complete compensation and the employee was promised an accumulation of severance compensation that would be paid to him if he was entitled to it, and there was no fear of the fate of compensation in the future.

Starting in 1983 (the first was the Hasna insurance company) and onward the insurance companies moved to selling "adif" type policies under different names according to the taste of each company. In these policies there was a separation between the premium for savings only, and the premium for the risk components (death and disability). Despite the clear distinction, the calculation of the compensation redemption value was done as was done in the "classic" policy, that is, the interest added to the compensation component, even when this component was in the "pure" savings part (without risk components), was added to the compensation component, and the compensation redemption value included only the The premium plus linkage to the index only, without profits.

As mentioned, the Income Tax Commissioner imposed the change in the calculation of redemption values and new instructions came into the world for calculating the redemption value of compensation, and for the purpose of calculating the tax (hereinafter "income tax redemption value") a calculation including profits was established. I use the word "profits" and not "interest", because starting in 1992 the issuance of the special bonds received by the insurance companies, which included a guaranteed interest rate, was completely canceled, and all the policies moved to a new type: "profit-participating policy", this is because the investment of the reserve to cover the insurance liabilities Haim was a "free" investment, in the capital market, yielding real estate, etc. according to the regulations on the investment methods of the capital and the funds of the insurance company as changed with the passage of time.

Since the redemption value for the employer was lower than the redemption value for the income tax, some argued that the higher value would also be used for the purpose of calculating the employer's debt for payment of severance compensation, which would have reduced the need to complete severance compensation if the accumulation fell short of the statutory compensation obligation. It is important to clarify that the argument Raised only in cases where the exemption does not apply according to Section 14 of the Severance Compensation Law, which exempts the employer from additional payment of compensation.

The purpose of this article is to clarify and prevent misunderstandings and disputes: the employer does not have a purchased or mandatory right in the amount of the redemption value for income tax purposes. This amount is a "virtual" calculation according to which the employee's tax liability is determined (if such a liability applies, in accordance with the tax exemption ceiling). It is determined in the relationship between the employee and the tax authority - the income tax, and it is not calculated for any other need, including the employer's compensation debt to the employee.

The value of the severance payment to the employer (which is the value of the "normal" severance payment) according to the established calculation is the determining factor for the purposes of the severance compensation law and for the purpose of the calculation whether the employer has an obligation to complete compensation according to the provisions of the severance compensation law or according to the employment contract (if he awards a higher amount from the statutory compensations - according to the law).

An insurance policy is a contract - it specifies the terms of the agreement between the insurer and the employer who enters into a contract with the insurer whose terms are specified in the policy. Whether the policy is a contract for the benefit of a third party (the employee) or whether it is a contract only between the employer and the insurer, the terms of the contract detail the engagement. When it is determined in the contract what the redemption value of the compensation is to the employer - he is the one who determines, and the employer has no right to demand a different calculation. Redemption value for income tax does not concern the employer.

To summarize: In policies where there is a separation between two types of compensation redemption value, to the employer and to the income tax, when they come to calculate the amount needed to complete severance pay, the amount to be calculated is the compensation redemption value to the employer and not the redemption value to the income tax. As explained above, the problem does not arise at all if the issue of compensation has been settled within the scope of the options established in section 14 of the Law on Severance Compensation, such as in a collective agreement, an expansion order or an agreement according to the above-mentioned general approval (there is another option - obtaining a special approval from the Minister of Labor according to an agreement not according to the general approval).