Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

Germany’s social security system

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Part 1 – General information

The German social security system is incredibly complex and varies fundamentally from systems of other countries. The parts of the system are very fragmented, and the legal structure is complicated. In addition, there are a lot of different players and organizations involved which makes it even harder to keep track with constant changes in legislation and court decisions. Even many Germans find it impossible to understand the system and its details, and for foreigners who relocate to Germany the system can easily become a devious monster. Therefore, we will publish a serious of articles with the aim to bring some light into this darkness.

The German social law is based on a legislation containing 13 different social law codes. This number alone illustrates the complexity of this law. The social security law covers five different schemes:

  1. Health insurance
  2. Nursing care insurance
  3. Pension insurance
  4. Unemployment insurance
  5. Accident insurance

These schemes in themselves do not differ from those of other countries. What differs is the structure and organisation of the system itself. The following details, explained below, may be different to other countries and are a constant source of misunderstandings and errors made by expatriates relocating to Germany:

Insured person

In many countries all individuals or adult people are either obligatory members of the system or obliged to contribute to different schemes (e.g., Switzerland, USA). In Germany normally only employees are obliged to enter the system and contributions must be paid by both the employee and employer in equal shares except for accident insurance. The contributions to the operational accident insurance must be paid by the employer only.

Despite this, certain self-employed people, contractual workers and freelancers are obliged to enter the system and pay contributions as well. Obliged professions are for example craftsmen and crafts businesses, midwifes, artists and publicists, educational professions, nursing persons, marine pilots and coastal skippers and those involved in the fishing business. In addition to that, self-employed people may be obliged to enter certain schemes such as pension insurance if they fulfil certain criteria. Specific professions like medical doctors, lawyers, chartered accountants and tax advisers have their own obligatory pension insurance schemes.

Other self-employed people may enter certain parts of the system on a voluntary basis. However, in each scheme the criteria for voluntary membership are different. For example, it is relatively easy to enter the pensions insurance, but the possibility to join the health insurance as a self-employed person is restricted.

Contributions to the system

In many countries social security duties are paid as an additional tax with collection administered by the tax authorities. In Germany social security contributions must be reported and paid to the relevant health insurance associations.

Players

In certain countries the social security system is administered by state or governmental organisations or subdivisions. The administration of the social security system in Germany is performed by numerous semi-official organisations. They are fundamentally self-governing corporations under public law who are controlled by state organisations.

(1) The pension scheme is administered by the “Deutsche Rentenversicherung Bund”, regional pension insurance associations and the “Rentenversicherung Knappschaft-Bahn-See”. The latter is responsible for professions in maritime shipping, for the German railway company and in mining.

The clearing office of “Deutsche Rentenversicherung Bund” is responsible for determining all social security schemes where an occupational activity must be classified as a social security relevant employment or a self-employment. More about this in a later article.

(2) The health insurance scheme is administered by 97 (!) health insurance associations. The health insurance associations collect the social security contributions of all schemes except the accident insurance. In general, social security reports must be submitted by the employers to the relevant health insurance association. Every person who is member of the system is free to choose between the associations. Since every employee is free to choose, the employer must submit reports to all those associations where his employees have joined as This can be a considerable extra administrative burden.

(3) The nursing care insurance is also administered by the health insurance associations.

(4) The unemployment insurance scheme is administered by the “Bundesagentur für Arbeit” which is mainly responsible for the promotion of job creation and the payment of unemployment benefits.

(5) The accident insurance scheme is administered by 9 “Berufsgenossenschaften” and 24 occupational accident insurance funds of the public sector. The associations are responsible for covering risks like accidents at work and occupational diseases and their prevention.

The fragmentation into various associations and organisations makes the administration especially for employers unnecessarily burdensome.

Term “employment”

The term “employment” is essential in social security law. This is because employees are obligatory members of the social security system and therefore obliged to pay contributions. To make things more complicated the term has different meanings in labour law, tax law and social security law. This is of special significance for managers and active shareholders of companies and managers and active partners of partnerships. While in labour law managers of companies or partnerships are in general not employees, the classification in tax law and social security law is not only different, but also differs between tax and social security law themselves. More about this in a later article.

Rates and payments

The rates for the different schemes are amended every year. The regular rates for 2022 are as follows:

 

Total rate

Employer’s part

Employee’s part

Health insurance

14.6%

7.3%

7.3%

Pension insurance

18,6%

9.3%

9.3%

Unemployment insurance

2.4%

1.2%

1.2%

Nursing care insurance

3.05%

1.525%

1.525%

There are certain minor adjustments for special activities and certain groups of insured persons.

The rate for the occupational accident insurance is dependent upon the risks of the relevant professional activities and the size of the enterprise. The premium must be paid by the employer only. The rate for the artists’ social security scheme for the year 2022 is 4.2%. All rates may change from year to year.

The social security contributions must be reported and paid at the latest on the third last working day of the month in which the employment was carried out. This is a problem if the remuneration is variable and therefore the ultimate amount of remuneration of the month is not definite before the end of the month. In this case an amending contribution statement is required.

International aspects

(1) Foreign employees who work in Germany will become part of the German social security system from the first day of work undertaken in Germany onwards. There is no 183-day rule like in income tax law. This is also the case if the employee is working for a foreign employer. Since 2021 the foreign employer has to appoint an authorized representative to fulfil his social security obligations such as reporting and paying of the necessary contributions (more information at https://scheller-international.com/blog-beitraege/german-social-security-the-need-for-an-authorized-representative.html). In this situation the difference between social security law and tax law becomes apparent. Contrary to the social security law a non-tax resident employer cannot report and pay the income tax for the employee to the tax authorities. The employee must declare his salaries and fringe benefits in his income tax return and pay income taxes in quarterly instalments.

(2) Foreign employees will not become part of the German social security system for a certain period of time if their employers send them on an assignment contract to Germany (more information at https://scheller-international.com/blog-beitraege/assignment-and-social-security.html). Again, the difference with income tax law becomes apparent because the employee is liable to income tax on a longer stay in Germany but may remain in the social security system of his home country.

(3) Specific circumstances must be considered if shareholders of companies or members of partnerships are relocating to Germany and continue to work for their companies or partnerships. This topic will be covered in a separate article.

(4) A speciality applies for pension insurance. To acquire a pension right in Germany the employer and the employee must pay social pension insurance contributions for a minimum period of 60 months. If the insured person reaches pension age or relocates to another country before the 60 months period has expired, he can reclaim his contributions. Whether periods of membership in a foreign social security system are included in the 60-months period depends on the social security agreement between Germany and the respective country. Within the EU, domestic and foreign times will be added together.

(5) Foreign employers try in general to avoid payroll duties if their employees relocate to Germany. Often, they “employ” the expatriates as “independent contractors”. In general, the agreement between both parties is similar to an employment contract with fixed remuneration, vacation payments and other employment-like issues. This is a dangerous way to proceed because German social security agencies could classify this as a “false employment” (more information at https://scheller-international.com/blog-beitraege/freelancer-and-the-false-self-employed-phenomenon.html).

Glossary

Accident insurance

Unfallversicherung

Artists’ social security fund

Künstlersozialkasse

Clearing Office

Clearingstelle

Contribution statement

Beitragsnachweis

Employee-like workers

Arbeitnehmerähnliche Selbständige

Employers’ liability insurance association

Berufsgenossenschaft

Employment

Arbeitsverhältnis

Federal labour office

Bundesagentur für Arbeit

Federal ministry of finance

Bundesfinanzministerium

Federal pension insurance association

Deutsche Rentenversicherung Bund

Health insurance

Krankenversicherung

Nursing care insurance

Pflegeversicherung

Pension insurance

Rentenversicherung

Social law code

Sozialgesetzbuch

Social security law

Sozialversicherungsrecht

Status determination procedure

Statusfeststellungsverfahren

Stock corporation

Aktiengesellschaft

Unemployment insurance

Arbeitslosenversicherung

Autor: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern

Bildquelle: www.fotalia.com

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