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Freelancers – How to make sure you get the right coverage from your keren pensia
Hi. It’s been a while.
One of the most common and complicated issues I encounter is assisting freelancers (atzmaiim) in setting up the insurance in their keren pensia. As I wrote previously regarding the insurance in a keren pensia, one can set up a keren pensia so that he or she will receive up to 75% of their salary in the case of disability and 100% for spouse, kids and dependent parent in the case of death (see this post for more details). For a salaried worker, the salary which determines the coverage (שכר קובע) is determined by the average recent salary upon which the percentages were paid in, but for a freelancer this is very complicated. Suppose that a freelancer makes an average of NIS 11,000, but only pays in NIS 500 a month, what kind of coverage will he or she have?
The default for all freelancers paying into a keren pensia meikifa is that whatever the person is paying in is 16% of their salary. This means that if Joe is earing around NIS 11,000 a month, but only contributing NIS 500 a month to his pension, if he fully disabled, his salary will be calculated as NIS 500 / 16% = NIS 3,125. He will then get only 75% of that (NIS 2,344) and will have to live with this tiny bit of money for as long as he is disabled.
There is a solution: You can arrange to set it up so that what you are paying in is as low as 10% of your salary. In order to do this, you usually need (1) a letter from your accountant that states what your expected annual earning will be (2) to fill out a form from the insurance company. It is important that you communicate with the company to make sure everything is set up correctly. As a reminder, once you have an assurance in writing from the company or your agent, they are legally responsible, so make sure to get it.
But returning to our case of Joe above, we see that Joe still does not have enough money to cover him. In order for Joe to be covered completely, Joe must increase his monthly contributions to NIS 1,100 a month and set it up so that they are calculating is as 10% of his salary. Remember, just depositing NIS 1,100 isn’t enough, he has to make sure they are calculating it as 10% of his salary, so that if he gets disabled he’ll get NIS 8,250 (75% of NIS 11,000) not NIS 5,156 (75% of NIS 6,875, which is 1,100 / 16%).
This gets complicated for atzmaim who only pay into their pension at the end of the year. Usually your salary is calculated based on an average of what you’ve paid in over the past 12 months, so it you are an atzmai who pays in a lot at the end of the year, then once the year-end money goes in you will be okay, but until then, you will be underinsured. You can either speak to the insurance company to make some kind of arrangement or else purchase a private אובדן כושר עבודה to help you bridge those first 12 months.
The important takeaways here:
- If you are a freelancer with a קרן פנסיה מקיפה, your שכר קובע is a very important issue and you must make sure that you are contributing enough so that it is set up correctly.
- This is the most common error I have seen with freelancers.
- It is incumbent of the freelancer, not the agent, nor the company, to make sure this is set up correctly.
- Always get it in writing – that is the only way you know that you’re covered. Even an e-mail is okay as long as it is from the company or agent and the coverage is stated explicitly.
- If you are going to pay in a lot at the end of the year, then the first year is a problem. Consider a separate אובדן כושר עבודה policy to cover this period.
2016 Israeli Tax Calculator
I recently updated my tax calculator. The latest version includes the new tax brackets and credits according to 2016.
You can download the latest calculator here or go to the following site:
https://www.box.com/s/460zksl3t4335018j5hp
The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly. If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי). If you need to get money back through an alignment see this post for more details.
Note: While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not. There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)
Use the guide as follows:
If you are paying less in taxes than what is calculated on the sheet: Find out what kind of benefits you are receiving and how to continue receiving them.
If you are paying more in taxes than what is calculated on the sheet: Odds are you need to do a tax alignment. Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.
As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me. I’m not perfect and odds are there may be an error or two, especially at the beginning of the year.
Are there any financial tools you would like to see? Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com
2015 Israeli Tax Calculator
I recently updated my tax calculator. The latest version includes the new tax brackets and credits according to 2016.
You can download the latest calculator here or go to the following site:
https://www.box.com/s/460zksl3t4335018j5hp
The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly. If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי). If you need to get money back through an alignment see this post for more details.
Note: While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not. There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)
Use the guide as follows:
If you are paying less in taxes than what is calculated on the sheet: Find out what kind of benefits you are receiving and how to continue receiving them.
If you are paying more in taxes than what is calculated on the sheet: Odds are you need to do a tax alignment. Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.
As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me. I’m not perfect and odds are there may be an error or two, especially at the beginning of the year.
Are there any financial tools you would like to see? Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com
FATCA and US Financial Reporting
By Chaim Korn
The 2010 United States Foreign Account Tax Compliance Act, better known as FATCA, requires foreign financial institutions to report to the IRS the names of their U.S. account holders. This will most probably begin in July 2014.
Banks and other financial institutions in most countries, including Israel, have indicated that they will comply with FATCA.
U.S. taxpayers worldwide have always been required to report their foreign accounts on their annual FBAR (FinCEN 114) report. In addition, since 2011, similar information is reported on Form 8938 (attached to Form 1040) for higher account balances.
US Persons (US citizens and green card holders) who are required to submit an FBAR or 8938, but haven’t, can face severe fines and even criminal charges in extreme cases.
Who is required to report?
FBAR: US Persons, who at any time during the year had more than $10,000 in all non-US financial institutions combined, must file the FBAR Report. Financial institutions include banks, brokerage accounts, certain pension funds and “keren hishtalmut” funds. Accounts include those owned jointly and even accounts owned by others for which you have signatory power over. The FBAR is an annual report due June 30th with regard to accounts during the previous calendar year. In contrast to tax returns, there are no extensions allowed for reporting the FBAR. The FBAR must be filed electronically.
Form 8938: US Persons living abroad who are required to file tax returns will have to add Form 8938 to their 1040 if the total account balance of all non-US financial institutions combined exceeds $200,000 at year end, or, more than $300,000 at any time during the year.. These amounts are double for married couples filing a joint return. Amounts are substantially lower for US residents.
Penalties: Penalties for failure to file the FBAR or Form 8938 are severe and can, in extreme situations, even include criminal sanctions.
If the IRS considers the failure to file an FBAR as non-willful, the fine can reach as high as $10,000 for each year that the report was not filed. The penalty for willful failure to file is the greater of $100,000 or 50% of the maximum amount held in all non-U.S. accounts during the year. For example, if a taxpayer has $200,000 in foreign accounts for six years and does not file the FBAR form or report income earned by the account each year, the IRS could assess a $600,000 FBAR penalty.
The penalty for failure to file Form 8938 is generally $10,000 per year.
The good news, however, is that if you can show reasonable cause for failure to file the reports, then the penalties can often be abated.
What should you do if you haven’t reported in the past
There are several approaches one can take in dealing with their overdue obligation with the IRS:
- Offshore Voluntary Disclosure Program
- Streamline Procedure
- Quiet Disclosure
The Offshore Voluntary Disclosure Program
Beginning in 2009, the IRS established a series of “Offshore Voluntary Disclosure Programs” to encourage taxpayers to come forward and disclose their non-U.S. accounts, pay reduced penalties, and avoid criminal prosecution. The current program requires taxpayers to file delinquent FBARs and amended income tax returns including income which was not previously declared (i.e., interest, dividend and capital profit), if any, and pay tax and penalties going back eight years. In order to be eligible for this program, a request for participation in the program must be filed before the IRS contacts the taxpayer regarding delinquent returns, and before a foreign financial institution reports to the IRS.
Taxpayers must also pay a single FBAR penalty equal to 27.5 percent of the highest aggregate balance held outside of the U.S. over the previous eight years. In addition, while the normal FBAR penalty applies only to non-U.S. financial accounts, the voluntary disclosure penalty applies to the value of any foreign assets that either produced undeclared income or were purchased with undeclared funds. For example, if the taxpayer has rental property overseas and did not declare the rental income, the value of the rental property will be included in the penalty calculation.
As the penalty under the voluntary disclosure program applies only once, rather than each year, it may significantly reduce the taxpayer’s potential FBAR penalties.
The Streamline Procedure
The Streamline process allows “low risk” taxpayers who have not lived in the US at any time since the beginning of 2009, to apply for a reduced reporting requirement which includes tax returns for the past three years and FBAR reports for the past six years.
Low risk refers to most taxpayers who owe less than $1,500 of tax per year. There are other criteria, as well, that must be checked before submitting reports using the Streamline procedure.
Quiet Disclosure
This method is simply filing all tax returns and FBARs that are delinquent. The advantage to this is that for taxpayers who either owe no tax or small amounts of tax, it will probably not raise any red flags. The downside of this approach is that it does not provide any protections that the formal voluntary disclosure program might provide, or any built-in compromise to reduced FBAR penalties.
Which Method is Best for You?
Taxpayers Should Act Quickly to Evaluate which Approach Best Suites Their Needs
FATCA will force most non-U.S. financial institutions worldwide to disclose account information on their account holders who are US citizens beginning in this summer. These U.S. taxpayers, many of whom may not even be aware of their obligation to disclose the accounts, may be running out of time to take appropriate action before the IRS takes its own. Remember, once your bank reports to the IRS, it will be too late to use the Voluntary Disclosure or Streamline reporting options. The quiet approach, as well, will likely be more risky.
Time is running out. If you haven’t been compliant in your reporting to the US, the best course of action in order to avoid potentially heavy fines from the IRS is to begin reporting immediately. Your tax professional can help you decide the best approach to take, but the most important piece of advice is to NOT procrastinate.
Chaim Korn is a Certified Public Accountant from New York with over 30 years experience. His offices are located in Ra’anana and Ginot Shomron and can be contacted at: chaim@tax-usa.co.il www.tax-usa.co.il
2014 Israeli Tax Calculator
I recently updated my tax calculator. The latest version includes the new tax brackets and credits according to 2014.
You can download the latest calculator here or go to the following site:
https://www.box.com/s/460zksl3t4335018j5hp
The Israeli Tax Calculator allows you to check your paycheck and see that the correct taxes were deducted correctly. If too much money is being taken out for taxes or insurance, then you should demand back your money through a tax alignment (תאום מס) or an insurance alignment (תאום ביטוח לאומי). If you need to get money back through an alignment see this post for more details.
Note: While the amount for insurance should match your paycheck perfectly, the amount you pay for taxes may not. There are other factors besides the ones mentioned in this spreadsheet that can affect the amount of taxes you pay (how much you got paid over the past 6 years, how often you get paid.)
Use the guide as follows:
If you are paying less in taxes than what is calculated on the sheet: Find out what kind of benefits you are receiving and how to continue receiving them.
If you are paying more in taxes than what is calculated on the sheet: Odds are you need to do a tax alignment. Speak to your HR person and fix up your tax record and then file the appropriate paperwork at מס הכנסה.
As always, if you find any flaws in these excel sheets or have any ideas for improving them, please feel free to contact me.
Are there any financial tools you would like to see? Please feel free to either leave some ideas in the comments below or e-mail me at jonnydegani@gmail.com
Using InfoMed to compare prices on insurance
As an American Jew, I have an aversion to paying retail; as an Israeli, my biggest fear is being a friar. So I was particularly thrilled when I found infomed’s insurance price comparison tool. One of the most common questions people ask when buying insurance is “how do I know I am getting a good deal?” This tool allows you to compare various prices for insurance plans, listed according to the breakdown I offered in my last 2 posts about seudi insurance and the different kinds of health insurance in Israel.
The site is pretty close to perfect. It obviously doesn’t include any extra you’d pay for a preexisting condition, nor does it update according to the CPI every month, but it’s a great reference to use before you buy insurance. Unfortunately, this site is only in Hebrew, so if you don’t speak the language very well, you may need to knock on your neighbor’s door for some assistance.
Remember, you won’t get a discount unless you ask for it. So next time your insurance agent shoots out a number, take a minute to find out what the retail price is and insist on paying less.
Speaking of which, if anyone needs health or seudi insurance, please feel free to contact me at jonnydegani@gmail.com for a quote. I am not an agent (yet) but my boss works with just about everyone and gives a discount to whoever I send his way.
the different kinds of health insurance in Israel
The first time I was offered to buy health insurance in Israel, I pushed it aside. Isn’t everyone covered for everything here? Well, kind of, but not exactly. This post seeks to explain the different levels of insurance in the country and what kind of coverage each layer provides.
Level One: Bituach Leumi (through your Kupat Cholim): Thank God, Israel is a first rate western country that provides an extraordinary level of medical care for all of its citizens. If an emergency comes up, you can go to the hospital and pay nothing. When you need to see a doctor, you can just sign up online and the cost is very small co-pay. Most medicines are subsidized, as are surgeries and other treatments. But there are still some things that aren’t covered. Instead, they are covered by the next two layers:
Level Two: Additional Health Insurance through Kuppat Cholim: If you have something like Magen Zahav of Meuhedet Adif, you have what is called shaban (שב”ן – שירותי בריאות נוספים). Shaban covers you for additional medicines that affect quality of life (ie treating a kidney stones in a way that hurts much less). Shaban cannot offer any additional protection for anything that can save your life. For that, you’ll have to turn to…
Level Three: Private Health Insurance: Almost all the insurance companies in Israel (not kuppot cholim) offer private health insurance. There are usually three levels: The lowest level of this insurance covers you for a certain amount towards transplants and surgeries abroad in the case of emergency. The next level offers a slightly higher level that covers a wider range of emergencies not covered by kupat cholim, as well as certain quality of life treatments as well. This level is usually called something like mashlim shaban – since it complements (להשלים) the insurance offered by the shaban – where the shaban pays for a part, the private insurance picks up the rest of the tab. The highest level covers a large plethora of emergencies and illnesses and pays you irrespective of whatever is covered by kupat cholim and the shaban (in fact, sometimes it will pay you extra for having gone through something, even if the shaban paid for it as well). Just to be clear, while almost all insurance company have the three kinds of programs above laid out above, there are variations; some cover more of X, some exclude Y, but the structure still holds.
In addition to the basic insurance laid out above, there are several kinds of “riders” or mini-policies which you can stick on your medical policy. Below is an outline of the five most common types and which ones I think are worthwhile:
1) Ambulatory – this covers preventative medicine, including check-ups, CTs and MRI. Of all the riders, I consider this to be the most worthwhile. It does cost a bit more, it does not cost nearly as much as…
2) Alternative medicines – if you’re a naturalist or hippy, go for it. If not, you can skip it. Of all the riders, this is usually one of the most expensive (because the client will probably use it for every sickness).
3) Personal doctor – this means that if you are suffering an illness, you have a personal case file and a doctor from the insurance company who monitors the progress so you know where you stand day or night. Some people consider this worthwhile, while others do not. It is a fairly inexpensive rider.
4) Expedited medicine – this rider is a hypochondriac’s dream. In the event of something wrong, you get to go to some facility or specific hospital where a team headed by someone like House MD finds what’s wrong with you and gets back to you within a few days. This rider isn’t so expensive, but most people opt to skip it.
5) A lump sum in case of contracting a specific kind of sickness (ie NIS 100,000 in case of cancer). The cost depends on how much you want the sum to be. When opting for this, and I recommend you do, opt for a sum that will allow you to get yourself and your family in order as the chaos of a sickness begins. For example, NIS 100,000 is a good amount for making sure that you are covered until disability insurance kicks in and for your family to adjust as you go through a crisis. To be clear, this money will not cover the cost of treatments abroad, as they usually cost much more than what is provided by these policies; you need to make sure the insurance covers the medical need and that this ride only covers the transition period for you and your family. If you’re wondering, this is a kind of teunot ishiyot – personal injury – insurance. In fact, the reason I am very critical of personal injury insurance generally (see last post) is that I think it should be bought in a policy like this rather than as a standalone. Buying it with this puts it in the specific context which helps the client choose the proper coverage he or she needs and doesn’t buy any unnecessary insurance.
There are dozens of other riders. Some are simple add ons, like a rider that provides a personal doctor for cancer, or a rider that ensures that all of your medical files are on a disc-on-key for immediate use when going to the hospital. There are also elaborate riders such as one that pay for a TV in the hospital, allows the sick person to order take away once a day, have his or her spouse stay at a nearby hotel and even pay for a temporary secretary to reschedule all of the person’s meeting while he or she is in the hospital. Every insurance company has its own specific riders and can choose to only allow certain riders with certain policies.
A final word on this subject. Some of you have the option of opting for additional health coverage through your work. This is usually a great idea and the cheapest way to get a good policy at a fraction of the price. A group policy includes at least 50 people at a single workplace – so you can’t just make a group out of you and your neighbours. The only downside to a group insurance policy is that you can’t add any riders that aren’t in it – you either take or leave the package.
If you have any questions about the various policies or are interested in getting some insurance for your family or a group policy for your business, feel free to contact me at jonnydegani@gmail.com.
Initial Results of Billing Companies Poll
A few weeks ago, I posted up a link to a polldaddy poll I created asking people about different billing companies in Israel. Despite my best efforts including 25 linkedin groups and a front page spot on Janglo, I only got 13 responses. Nonetheless, 14 is better than 0 and I actually found the results to be surprising – so without further ado.
5 of the 14 responses were from people who worked with Sveram. The reviews were mostly lukewarm to cold. While Sveram pays on time and is easy to use, there seem to be issues with customer service.
4 of the 14 responses were for Yeul Sachir. 2 people loved them, one was lukewarm and one hated them. Yeul Sachir is the most Anglo friendly, but some have issues with being paid correctly.
4 of the 14 responses were for Taxpay. This was a shock to me; I didn’t know many Anglos used Taxpay, but according to these responses, they do and they love it. Taxpay had the best feedback with the only criticism being that one person though the system was a bit complicated.
1 of the 14 responses was for Atzmai Sachir giving it a lukewarm to positive review and not much detail.
Poll: Billing Companies in Israel
A while ago, I published a post about billing companies and freelancing in Israel. Since publishing this post, I have received dozens of e-mails asking me which service I preferred. Since I only worked with one company, I clearly cannot give any personal recommendations and opinions about all the companies.
If you worked with any billing company, or know someone who has, please fill out or ask him/her to fill out the poll at this site (http://jonnydegani.polldaddy.com/s/billing-company). If you worked with more than one company, please fill it out once for each company. I will publish the results and analysis next week.
Thanks,
Jon
Pensions Part Two: The 5 Types of Pension Plans
Some introduction: Until the mid 90′s, Israeli pension plans were defined benefits plans, where one would pay into the pension plan based on his or her salary, and would receive an annuity (monthly amount received) upon retirement as well as a certain level of insurance. The amount of the monthly annuity was based on the amount of years paid into the pension and the last salary received by the employee (or in some cases, your average salary). Back then it was easy to choose a pension; one would compare the benefits of the plans and pick the one he or she felt best suited his or her needs.
In the mid 90′s the investment companies complained to the Israeli government about having to take responsibility for their own work and successfully lobbied for a defined contributions system, a system where the annuity one gets upon retirement is based on how much money is in the fund. Okay, now in English. The money I deposit into my pension fund is invested for me. When I begin to retire, the pension fund manager looks at how much is in my fund and based on that (and a few other factors) decides how much I get as an annuity (if you’re wondering, you can get some as a lump sum, but that just affects the amount you’ll get for an annuity afterwards.)
There are five types of Pension Plans
(1) – קרן פנסיה מקיפה חדשה – also called זכאיות
קרנות חדשות are the most common type of pension fund and will be the major focus of this series. קרנות חדשות are defined contributions plans that also include some level of life and disability insurance, earning them the label as a comprehensive (מקיפה) retirement plan. These funds are entitled (זכאי) to invest up to 30% of the assets in government subsidized bonds that pay a dividend of 4.86%. Due to the government subsidy included in the fund, workers may only invest up to 20.5% times twice the average wage into these funds each month. Any additional money set aside for retirement must be invested in one of the following funds.
(2) – קרן פנסיה כללית
קרנות כלליות pension fund that do not include any insurance and is not entitled to government subsidized bonds. These are typically used by three groups (1) someone who wants to invest in a particular כללית fund and has no need for insurance and (2) upper middle class and wealthy individuals who make more than twice the average wage and therefore cannot put all of their money into חדשות and (3) people who want to put their money in a fund by themselves from money they earn other than the regular money put into ther pension (ie from commissions). In the past, people would also invest in these funds to avoid paying fees on deposits, although the new fee laws of 2013 made this mostly irrelevant (see the upcoming post about fees)
(3) – ביטוח מנהלים
ביטוח מנהלים, manager’s insurance, is an alternative arrangement where money is put aside for a salaried worker’s pension in a direct contract with an insurance company. Practically, this means that there is more room for variety when it comes to insurance and the money can be invested in a different way than the other קרנות פנסיה.
To understand the primary appeal ביטוח מנהלים, one must understand its most important feature in the past, a fixed מקדם המרה. The מקדם המרה is the number by which the pension is divided in order to figure out an annuity. For example, if my pension has one million shekels and I have a מקדם המרה or 200, I’ll get an annuity of ₪ 5,000 a month. If it is 250, I’d get a pension of ₪ 4,000 a month. In a regular קרן פנסיה, the מקדם is set upon one’s entering retirement and is based on the life expectancy of the worker, his or her spouse and the interest rate. ביטוח מנהלים offered a fixed מקדם המרה where one did not have to worry about the rise in life expectancy. Unfortunately, in order to do this, many insurance agents used predatory marketing to convince people to pay five or six times the fee they would pay for a similar קרן פנסיה in order to avoid a rise in life expectancy that has been deemed unrealistic by mainstream science. Thank God, the government passed a law banning the sale of ביטוח מנהלים with a fixed מקדם המרה as of 2013, while also slashing the ridiculous amount that ביטוח מנהלים was charging in fees (see the upcoming post about fees). Practically this turned ביטוח מנהלים into an alternative to קרנות פנסיה with only slightly higher fees, although more variety when it comes to insurance and more flexible bequeathing rights.
(4) – קרן פנסיה ותיקות
These are the old defined benefits pensions from before 1995. Either you’re already signed up for this or you’re never going to be. Like the current חדשות and כלליות, some had insurance and others did not. Also, about half of the ותיקות were on the verge of bankruptcy and had to be bailed out by the government in 2003. Those companies that were bailed out were done so with the agreement that they must pay less to their clients than had been promised during all the years that the clients paid into the fund. If you have an elderly Israeli relative complaining about the government screwing him out of his pension, this is what he’s talking about.
(5) – קרן פנסיה תקציבית
These are similar to ותיקות, only these are only for government and university employees. I’d tell you about all the perks they had, but it would probably make you cry with jealousy. Suffice it to say, people with these made out like bandits.
My primary series will only deal with the first three types of pension plans, as these are the only ones from which one can choose from today.
Shomer Shekalim 