Newsletter – The Belgian Supreme Court sets strict rules for the effective use of ‘cafeteria plans’

One of the key elements of such cafeteria plan is that each feature is subject to its proper and specific income and social security tax treatment. Therefore, certain benefits in such plan (e.g. a mobility budget, stock options) may benefit from favorable income tax treatment, whereas others (e.g. specific insurance offerings) benefit from favorable social security tax. Obviously, in order to be effective, the specific rules around each feature must be observed lest the benefits may undergo the usual (more cumbersome) tax treatment reserved for salary.

In Belgium, the attractiveness of such cafeteria plans is also clearly fostered by the very high income and social security tax burden on earned income. So, the objective and use of such plans is often quite blurry between post-modern HR policies (the individualization of compensation packages in content and over time) and sheer tax efficiency of pay.

A recent example of such blurred use is reflected in a case which has now been handled by the Supreme Court twice (on 25 March 2019 and now again, on 10 June 2024).

In a cafeteria setting for a small company (with fewer than 50 employees), part of the base salary was converted into benefits, among which an extra-statutory monthly supplement to child allowances. Generally, supplements to benefits under the mandatory social security scheme (such as unemployment, sickness, child allowances, pension etc) are exempt from regular social security tax. They may be subject to specific taxes or levies. In the plan at stake, the company simply allowed for employees (with dependent children) to choose for this supplemental allowance with the tax exemption.

This was challenged by the social security administration. In its 2019 ruling, the Supreme Court held that the plan did not require any proper justification for the grant of the allowance such as the evidence that it is meant to offset the higher cost of upbringing of children (as a ‘social risk’ covered by the social security system). The plan (and the company) merely stated that the grant of the allowance generated an increased net income. That justification was deemed insufficient to warrant the characterization of the allowance.

In its 10 June 2024 ruling, the Supreme Court reiterated that same reasoning and found the intermediate Brussels Court of Appeals holding unwarranted. In that Brussels judgment, the court had accepted that the grant of the allowances was exempt from social security tax on the basis that the allowance increased the net income, that the beneficiaries had childcare and the amount of the allowance was not excessive. According to the Supreme Court, in order for the allowance to benefit from the tax exemption it is required that the extra-statutory allowance is shown to specifically aim at offsetting the incremental cost generated by the realization of the ‘social risk’ of childcare.

In the meantime, the social security administration, in its administrative guidelines for employers, has deleted any reference to child allowances as a permitted feature of tax-exempt benefits.

The potential consequences of any mechanic set-up or of any plan which is purely driven by tax efficiency can be quite extreme. Indeed, under the previous legislature, a bill was submitted to Parliament aiming at regulating cafeteria plans (Parl Docs, Doc 55, 1715/001, 6 January 2021). The content of the bill is a true disaster to any genuine cafeteria plan, with incoherent rules, restrictions on freedom of bargaining, and severe financial sanctions. In fact, the stated rationale underling the bill and justifying the need for strict regulation of cafeteria plans, is the alleged genetic objective of tax evasion of any such plan, with an express reference to the afore-mentioned Supreme Court ruling of 2019.

In essence, therefore, the Supreme Court position can be supported and applauded. The key to any successful cafeteria plan – as noted above – is for the parties to respect to the fullest extent the differentiated and specific conditions for each feature to benefit from its particular (income and social security) tax treatment. This means that the design and drafting of any such plans requires careful thinking and a delicate legal analysis. Failing that, and merely using a cafeteria plan mechanically and exclusively for tax efficiency reasons, creates a real risk of undermining the whole concept of a genuine cafeteria plan, and its intrinsic value as an instrument of any modern compensation and HR policy.