Combination of Leave Savings and Generation Scheme in The Netherlands: Fiscal Balancing

Publication date: March 11, 2025

The generation scheme - also known as seniority scheme - allows employees to work less towards the end of their employment while maintaining the same salary and pension accrual. Increasingly, a generous leave savings scheme is introduced alongside this. Both schemes are largely dictated by fiscal conditions, and combining them can create problems.

The Generation Scheme and the 50% Requirement

The generation scheme (“Generatieregeling”) has fiscal limitations: 50% employment, 100% salary, and 100% pension accrual. The pension accrual and salary can remain at the same level as if the older employee had not started working less. If the 50-100-100 norm is met, the generation scheme is not considered an RVU (“Regeling voor Vervroegde Uittreding”, or early retirement scheme). The employer is then not liable for the 52% penalty tax on the portion of the salary for which no work is performed.

In employment practice, less extreme variants are common, such as an 80-90-100 scheme. To prevent the creation of an RVU, the generation scheme must stipulate that at least 50% of the work is actually performed from the employment ten years prior to the pension age (usually 68). This is referred to as the fiscal 50% requirement.

Example 1: An 80-90-100 scheme is applied. An employee works 80% before turning 58. Due to the 50% requirement, the actual employment in the next 10 years must be at least 50% of 80% = 40% to avoid RVU tax liability. The employee decides to work 64% (80) from age 58. The employer supplements 8% of the salary and pays as if 72% (90) is paid. The employee builds up a pension as if working for 80% (100). Because the employee works at least 50% of their original employment due to the 64% employment, the 8% supplement is not considered an RVU.

Leave Savings ”Verlofsparen” and the 50% Requirement

The fiscal limit for leave savings is 100 times the weekly working hours. The employer and employee decide which sources can be used to form the leave savings balance. Annually, the employer must monitor the limit of 100 times the weekly working hours and settle any excess based on the current salary and contract duration. By saving leave, the employee realizes tax deferral. The employee can also use the leave balance during the period they are utilizing a generation scheme. An extremely important point of attention is that the above 50% requirement must be strictly observed to avoid inadvertently creating an RVU.

Example 2: The employee in example 1 wants to reduce employment from 64% with 25% from the leave balance. Employment drops to 39%. The employer continues to pay 72%; 39% salary, 25% from the leave balance, and 8% due to the guarantee scheme. However, since the employee effectively works 39% - and thus less than 50% of the original 80% - the 8% supplement due to the guarantee scheme is considered an RVU, and a 52% penalty tax is due.

Checks and Balances

There are several points of attention and issues to be addressed with the above-mentioned fiscally facilitated schemes. We name a few.

When introducing a generation scheme, checks and balances must be conducted to realize salary continuation, prevent RVU tax, and maintain pension accrual. A good regulation and flawless administration and control are indispensable.

There are several points of attention and issues to be identified with the above-mentioned tax-facilitated schemes. We will mention a few.

• When introducing a generation scheme, checks and balances must take place, among other things, to realise continued salary payment, prevent the RVU levy and continue pension accrual. Good regulations and flawless administration and control are indispensable.
• When introducing a generous leave savings scheme, the balance must be administered and checked and settled insofar as more than 100 times the weekly working hours of leave can be taken. Good regulations and administration are also important here.
• If both schemes are combined by being part of the employment conditions, it is important to regulate possible overlap in order to prevent unwanted RVU levy or an excessive pension. For example, it is possible to determine that no withdrawal may take place from the leave savings balance during the Generation Scheme. If the fiscal 50% requirement can be properly monitored, simultaneous use could be permitted.
• When introducing a generous leave savings scheme – which applies to every employee – the employer can consider abolishing the Generation Scheme (which makes an age distinction) and making the savings available to all employees in the form of a deposit into leave savings.