Employers underuse the option of voluntary sickness benefit

As of 15 May 2024, a legislative amendment entered into force that allows employers to pay voluntary sickness benefits to employees under more favourable conditions than before. So far, this change has received relatively little attention, yet its implementation enables employers to make a significant contribution to employee well-being.

As payroll experts at Grant Thornton Baltic, we often see when starting cooperation with new clients that the option to pay voluntary sickness benefits has not been used. In addition, payroll and tax calculation setups do not always fully comply with the current legal requirements, meaning that employers fail to take advantage of the benefits provided by law.

Under the voluntary sickness benefit scheme, employers may now pay up to 100% of an employee’s average calendar day earnings exempt from social tax (previously limited to 70%). Only personal income tax must be withheld from the benefit.

The previous regulation (effective from 1 July 2023) allowed employers to compensate only the second and third day of sickness at 100% exempt from social tax. The first sickness day was subject to all labour taxes.

The legislative amendment allows employers to pay voluntary sickness benefits as follows:

• Temporary incapacity for work:
  Employers may compensate days 1–8 of sickness at 100% of average earnings exempt from social tax. From day 9 onwards, the Health Insurance Fund pays 70% of the benefit, and the employer may additionally compensate up to 30% of average earnings exempt from social tax.
• Pregnancy-related sickness leave:
  The Health Insurance Fund pays compensation from the second sickness day at a rate of 70%. The employer may compensate the first sickness day at 100% and subsequent days at 30% exempt from social tax.
• Work accident, occupational disease or illness resulting from preventing a crime:
  The Health Insurance Fund pays compensation from the second day at 100%. The employer may compensate the first sickness day at 100% of average earnings exempt from social tax.
• Care leave:
  The Health Insurance Fund pays compensation from the first day at 80%, and the employer may additionally compensate 20% of average earnings exempt from social tax.

The average calendar day earnings are calculated based on the previous six months. To do this, the employee’s earned wages over the previous six months are added together and divided by the number of calendar days in the same period, excluding days of absence. Absences include calendar days away from work under § 19 of the Employment Contracts Act.

Example

An employee is on sick leave for 10 days.
Total wages earned during the previous 6 months: EUR 6,000
Calendar days in the previous 6 months: 183
Days absent: vacation 14 days, sickness 9 days

Average calendar day earnings:
6,000 / (183 – 14 – 9) = EUR 37.50

Employer’s gross compensation:

• Days 1–8: 37.50 × 8 = EUR 300
• Days 9–10: 37.50 × 2 × 30% = EUR 22.50

Voluntary sickness benefits are subject only to personal income tax. No social tax, unemployment insurance contributions or funded pension contributions are payable on the benefit.

For resident employees, voluntary sickness benefits are declared on Annex 1 of the TSD return under code 24.

For non-residents, the benefit within the permitted limit is declared on Annex 2 of the TSD return as follows:

• employee – payment type 129
• official – payment type 130
• management board member – payment type 157

If an employer decides to continue paying full salary to an employee during sickness leave and the amount paid exceeds the average earnings, the excess portion is subject to all labour taxes.

The excess amount is declared according to the payment type:

• for residents, on Annex 1 of the TSD under payment types 10, 11, 12, 13, 21, 22 or 23;
• for non-residents, on Annex 2 under payment types 120, 121 or 122, and for management board members under payment type 157.

To apply voluntary sickness benefits correctly, employers and payroll accountants need to critically assess existing payroll processes and ensure that the solutions used support the current regulation.

In particular, employers should:

• review payroll software taxation and benefit settings;
• ensure a clear distinction between benefits within the statutory limit and amounts exceeding the limit;
• automate average earnings calculations to reduce the risk of errors and ensure consistent monitoring of limits.

Grant Thornton Baltic’s payroll and tax advisory specialists support employers in reviewing existing payroll setups, identifying potential risks and paying voluntary sickness benefits in compliance with current regulations. Where necessary, we also assist with payroll software configuration and process optimisation, enabling employers to use the opportunities provided by law to the fullest and in a secure manner.