The Law of the Individual Capitalization Labor Reserve Fund Managed by the Private Contribution Regime (RAP) is a fundamental pillar in protecting labor rights in Honduras. Labor specialist Lilian Cruz shares an analysis of the Labor Reserve Fund Law with us.
Published on May 28, 2024, this law establishes a robust system for managing and disposing of the funds contributed by employers in favor of workers. Below, we explore the key aspects of this regulation in detail, from the integration of the fund to recent reforms.
Integration of the Fund and the 4%
One of the central elements of this law is the integration of the Labor Reserve Fund. According to Article 3, the RAP will be responsible for administering this fund, which is constituted through monthly contributions from employers.
These contributions amount to 4% of the worker's ordinary salary, with a contribution ceiling of three highest-level minimum wages, which is L 16,856.25 x 3 = L 50,568.75.
For example:
If the employee receives a salary lower than L 50,568.75, the 4% is calculated based on the worker's ordinary salary.
If the employee receives a salary higher than L 50,568.75, the 4% is calculated based on the ceiling of three highest-level minimum wages, which is L 50,568.75 (L 16,856.25 x 3 = L 50,568.75).
Employee Salary | IVM Calculation Percentage |
Less than L 50,568.75 | 4% of the worker's ordinary salary |
More than L 50,568.75 | 4% of the ceiling of three highest-level minimum wages (L 50,568.75) |
This percentage is crucial for ensuring a significant accumulation in workers' individual accounts, providing solid financial support in case of job termination.
Payment of the Labor Reserve
Article 6 of the Labor Reserve Fund Law (RAP) addresses the procedure and conditions under which workers can receive the payment of the individual capitalization labor reserve. Below are the main aspects of this article and the different cases presented:
Payment of the Labor Reserve
1. Termination of the Employment Relationship:
Worker's Right: When the worker ends their employment relationship for any reason, they have the right to receive the accumulated value in their Individual Capitalization Labor Reserve account managed by RAP.
Unjustified Dismissal Case: If the worker is unjustifiably dismissed, the amount accumulated in the labor reserve is deducted from the severance assistance. If the account balance is higher than the severance assistance, the difference is paid to the worker as additional compensation.
2. Voluntary Termination by the Worker:
Seniority Premium: If the worker voluntarily terminates their contract, they are granted 100% of the balance in their Labor Reserve account. If this balance is less than 35% of what would correspond for severance assistance (in case of more than 15 years of service), the employer must complement the payment.
3. Death or Disability:
Worker or Beneficiary Rights: In the event of the worker's death or total and permanent disability (from causes not related to professional risks), with more than six months of seniority, the legal beneficiaries or the worker receive 100% of the Labor Reserve account balance.
Employer Obligation: If the balance is less than 75% of the compensation that would correspond for severance assistance, the employer must complement the payment to the beneficiaries.
4. Procedure in Case of Worker’s Death:
- Beneficiaries: If the worker dies, the Labor Reserve account funds are delivered to the designated beneficiaries without the need for other procedures. In the absence of designation, a judgment of declaration of testamentary or intestate heirs is required.
Exceptions to the Law
There are certain exceptions to the mandatory affiliation to RAP, detailed in Article 7. For example, workers contributing to certain social security institutes are not required to affiliate with RAP, such as:
National Institute of Retirement and Pensions for Executive Branch Employees and Officials (INJUPEMP)
National Institute of Teachers' Welfare (INPREMA)
Military Welfare Institute (IPM)
Social Welfare Institute for Employees of the National Autonomous University of Honduras (INPREUNAH)
Diplomatic delegations and international organizations accredited in the country.
Calculation of Income Tax
An important aspect to consider is how Income Tax is calculated in relation to the labor reserve fund. According to the regulations, contributions to the fund are not considered part of the worker's taxable income. This means that when calculating withholding at source, contributions to the labor reserve fund should not be included as part of the employee's income.
Likewise, this article states that the income the employee receives as benefits derived from this fund is also exempt from income tax.
Reform to the RAP Law
Through the Labor Reserve Fund Law, reforms are applied to Articles 42, 43, and 61 of Legislative Decree No. 107-2013, which contains the Private Contribution Regime (RAP) Law.
First, Article 42 is reformed, which states that every employer, whether a natural or legal person, must register and register their workers in the RAP registry of contributors no later than within sixty (60) days.
The second reform applies to Article 43, on the withholding and payment of worker-employer contributions, which indicates that both the employer and the employee must contribute 1.5% each to total 3%. The withholding will be made on the amount that exceeds the established ceiling for contributions destined to the Disability, Old Age, and Death (IVM) Regime of the Honduran Social Security Institute (IHSS), which is L 11,336.32.
For example:
If an employee has a regular monthly salary of L 20,000.00, the IVM ceiling of L 11,336.32 is first subtracted. This leaves L 8,663.68 as the surplus. On this surplus, both the employer and the employee will calculate 1.5%.
Monthly Regular Salary | IVM Ceiling | Surplus | IVM Calculation Percentage (Employer and Employee) |
L 20,000.00 | L 11,336.32 | L 8,663.68 | 1.5% |
$ 805.81 | $ 456.74 | $ 349.06 | 1.5% |
For more information on how this innovation may affect your operation or investment in Honduras, the Galindo & Asociados team is at your disposal.
Lilian Cruz
HN | Asociada
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