Social fund: creation and use

The social fund is an instrument through which an employer contributes to social policy for its employees. Creating it is mandatory for most employers, and there are clearly defined rules for using it. A properly set-up social fund boosts employee satisfaction while meeting the statutory requirements that inspectors routinely check during audits.

What the social fund is and who creates it

The social fund is governed by a separate act, and creating it is an obligation of employers to the extent laid down. It is created as a percentage of the total gross wages of employees and may be supplemented from other sources. The purpose of the fund is to finance employees’ social needs beyond the regular wage, which makes it a practical tool for a company to look after its people.

• the mandatory allocation from the base,
• a possible further allocation,
• other sources as provided by law.

How the fund is created

The basis for creating the fund is the total gross wages booked for employees, from which the mandatory allocation is calculated within the range set by law. The employer may also make a higher, voluntary allocation if this is agreed in a collective agreement or an internal regulation. As the percentage range and the rules may change, always check the current figures in the Social Fund Act in force.

What the fund can be used for

The social fund’s resources can be used for the purposes defined by law and by internal rules, for example for meals beyond the statutory obligation, commuting to work, rest and recuperation of the workforce, culture, sport or social assistance. The specific use is usually set out in a collective agreement or an internal directive so that it is transparent, fair and the same for comparable groups of employees.

Rules and records

Both the creation and the use of the fund must be recorded and must comply with the agreed rules. It is advisable to have a clear internal directive setting out the purposes, conditions and method of use, so that there are no disputes and the resources are not used for purposes other than those intended.

1. set the base and the allocation to the fund,
2. lay down the rules in a directive or a collective agreement,
3. record both the creation and the use,
4. use the fund only for the agreed purposes.

Why proper management matters

Incorrect creation of the fund or its use outside the agreed rules can lead to problems during an inspection and to additional payments. Professional payroll and accounting services ensure that the social fund is created and used correctly and in accordance with the regulations in force.

The social fund and accounting

The creation of the social fund is reflected in the accounts as an expense and at the same time as a liability towards the fund, from which it is later drawn. It is advisable to keep the fund’s resources separate so that it is clear at any time how much has been created and how much remains available. At the end of the year the fund is settled: creation and use are compared and the balance carried forward to the next period is determined. Correct accounting is also important from a tax point of view, as the mandatory allocation affects the tax base. Linking payroll and accounting therefore ensures that the social fund is not only created and used according to the rules but also correctly reflected in the company’s financial statements. Clear records also make it easier to answer any questions from employees and inspection authorities about how the fund’s resources were used.

If you need to set up the social fund and its records correctly, Bilvao’s accountants will be happy to help you.

Related articles: Onboarding a new employee: the employer’s obligations, Home office and how to set it out in the employment contract, Employee benefits and their tax treatment.

Frequently asked questions

Is creating a social fund mandatory?

For most employers, yes, to the extent laid down by a separate act. The fund is created as an allocation from the total gross wages. Check the specific percentage range, as it may change.

What can the social fund be used for?

For the purposes defined by law and by internal rules, for example meals, transport, recuperation, culture or social assistance. The specific use is set out in a directive or a collective agreement so that it is transparent.