YEL reform in a nutshell: What entrepreneurs should know

 

The Government has submitted to Parliament a proposal to reform the Self-Employed Persons’ Pensions Act (YEL). Under the proposal, entrepreneurs would have more freedom than before to choose the basis for their YEL income. At the same time, income earned from entrepreneurial activities would have a more direct impact on the determination of YEL income and pension contributions.

If Parliament approves the proposal, the reform will enter into force on 1 January 2028 and will be applied to earned income from 1 April 2028 onwards.

Entrepreneurs will choose between two ways of determining YEL income

The most significant change concerns how YEL income is determined. From the beginning of 2028, entrepreneurs will choose either an earned income model or a comprehensive assessment model as the basis for their YEL income. The chosen model will apply for three years at a time.

Under the earned income model, YEL income is based on the entrepreneur’s taxable earned income from business activities. Earned income is based on either data from the Incomes Register or the latest confirmed tax data.

For entrepreneurs operating through limited liability companies, invoicing service companies or receiving work compensation, earned income can be determined based on Incomes Register data where such information is fully available. For sole traders and entrepreneurs operating through general partnerships and limited partnerships, earned income will be based on confirmed tax data. The use of the Incomes Register will make income information more up to date for some entrepreneurs.

The comprehensive assessment model follows the same basic principles as the current system. The pension insurance company assesses the monetary value of the entrepreneur’s work input. In addition to the median wage in the sector, the assessment takes into account factors such as the amount of work performed, the scope of business activities, the entrepreneur’s professional skills and other information describing the value of the work input. Entrepreneurs may also submit their own statement regarding their situation.

The obligation to take out YEL insurance will continue to be determined based on an overall assessment of the entrepreneur’s work input. Choosing the earned income model alone will therefore not determine whether an entrepreneur falls within the scope of YEL insurance.

The basis for YEL income is selected for three years

Every three years, the pension insurance company will provide the entrepreneur with estimates of their YEL income under both the earned income model and the comprehensive assessment model. The entrepreneur will then choose the option that best suits their situation for the next three-year period.

Under the earned income model, the amount of YEL income will be reviewed annually based on available income information. Under the comprehensive assessment model, the relationship between YEL income and the entrepreneur’s earned income will also be monitored annually.

The comprehensive assessment model will include an income-based minimum level

After the transition period, YEL income under the comprehensive assessment model cannot be lower than 50 per cent of the entrepreneur’s taxable earned income.

The minimum level will increase gradually. In 2028, YEL income must be at least 30 per cent of earned income. Thereafter, the minimum level will rise by five percentage points each year until it reaches 50 per cent.

The pension insurance company will compare YEL income determined through the comprehensive assessment model with the entrepreneur’s earned income annually. If the confirmed YEL income falls below the statutory minimum level, it will be increased accordingly. This is an annual statutory comparison and is separate from the entrepreneur’s three-year model selection.

More flexibility in contribution payments

The possibility to reduce YEL contributions temporarily will increase from the current 20 per cent to 25 per cent. This means that entrepreneurs may temporarily pay a lower YEL contribution without reducing their confirmed YEL income.

This is different from lowering YEL income itself. Even if the entrepreneur pays a reduced contribution during a year in which flexibility is used, social security benefits will still be based on the confirmed YEL income. However, using the flexibility option will affect the amount of pension accrued for that year.

The discount for new entrepreneurs will be discontinued

The separate YEL contribution discount for new entrepreneurs will be discontinued. Discounts granted before the new legislation enters into force will remain valid for their current duration.

In the future, new entrepreneurs will be able to make use of the expanded contribution flexibility. This means that the opportunity to reduce contributions will no longer be limited to the first years of entrepreneurship but can be used whenever the entrepreneur’s financial situation requires it.

YEL insurance may be terminated during longer periods of illness or parental leave

Entrepreneurs may terminate their YEL insurance during a sickness or parental allowance period lasting at least three months if their work input falls below the threshold requiring YEL insurance. The entrepreneur must notify the pension insurance company.

The reform will affect entrepreneurs in different ways

The reform will affect the YEL income used as the basis for contributions in different ways depending on the entrepreneur’s income level and the model chosen.
According to the impact assessment prepared by the Ministry of Finance, YEL income is expected to decrease for nearly 40 per cent of entrepreneurs by 2033. It is expected to remain unchanged for just under half of entrepreneurs and increase for just under 20 per cent. The decrease is expected to be most common among lower-income entrepreneurs. YEL income is expected to increase for some entrepreneurs whose current YEL income is low in relation to the earned income generated by their business activities.

YEL income affects both pension contributions and the level of pension and social security protection. In addition to future pension benefits, it determines the level of benefits such as sickness and parental allowances. Entrepreneurs should note that while lower YEL income reduces pension contributions, it also leads to lower pension and social security protection.

No action is required yet

Entrepreneurs do not need to take any action at this stage. Existing YEL insurance policies and confirmed YEL income will remain unchanged.
If Parliament approves the proposal, entrepreneurs will choose between the two YEL income models before the new system enters into force.

At Elo, we will ensure that our customers receive up-to-date information about the effects of the reform. We will inform our customers well in advance about when and how they can choose the basis for their YEL income. Information will be provided through our website, newsletters and customer webinars. Our customer service specialists are available to help entrepreneurs with questions concerning both their pension security and the upcoming reform.

The first customer webinar will be held on Friday 6 November at 9.00. Register now.