New Social Insurance Law Aims to Improve Social Welfare System in China

March 8, 2011 Posted by China Briefing Reading Time: 4 minutes

Mar. 8 – The Social Insurance Law (SIL) of the People’s Republic of China that was finally adopted by the government on October 28, 2010 is going to become effective on July 1, 2011. Noticing the country’s emerging phenomena such as an increasingly mobile workforce and an influx of foreigners for employment, the new SIL is set to become the first comprehensive law in China’s social welfare system that covers both urban as well as rural residents, and applies to state-owned enterprises, foreign invested enterprises, joint ventures, privately-owned enterprises as well as their employees in China.

First proposed and planned about 16 years ago, the SIL broke China’s usual legislative practice to debate on an issue no more than three times before the adoption of a law, indicating the great importance and complexity of the country’s social welfare issues.

The SIL clarified that China’s social security system will the following five types of mandatory insurances:

Pension
Basic medical insurance
Unemployment insurance
Work-related injury insurance
Maternity insurance

Both an employer and employee shall contribute to the first three items, while an employer shall at the same time contribute to the last two items.

Since the SIL did not specify the contribution rates or the calculation basis for each kind of insurance, local governments will be able to formulate their own policies according to their respective local economic realities.

Policy goal: a portable and unified system
The SIL will lift the restriction on the social security relationship transfer from one city to another. Individuals will be able to transfer their pension, basic medical and unemployment insurance relationships when they decide to move to a different city for new employment. Individuals can also calculate their social security contribution years cumulatively, regardless of their work location changes. The SIL will establish a system to track and settle basic medical claims across regions, in order to enable the people who pay their medical insurance in one city to access it in another city.

The SIL also calls for a unified national social insurance number system. Each citizen’s social insurance number will be his/her identification card number.

A basic pension insurance fund will initially be set up on the provincial scale and then gradually converted to the nationwide scale. Every province, autonomous region and municipality is allowed to combine the implementation of the rural pension system with the urban system depending on actual local circumstances.

Other social insurance funds will also be progressively introduced at the provincial level, according to the SIL.

Experts believe that a more portable and unified social welfare system will greatly facilitate the human resources mobility within the country.

Other features of the new law also include:

A prepayment guarantee by the work-related injury insurance fund in case the employer or the third party who causes the injury fails to cover the related medical charges
The coverage of hospital food allowance as well as transportation and accommodation fees for medical treatment outside the city where the employee works, with regards to work-related injuries
The coverage of basic medical charges to the unemployed who enjoy unemployment insurance, without requiring them to contribute to medical insurance separately
Maternity benefits to employees’ unemployed spouses

Enforcement: closer supervision and harsher penalties

The SIL gives the social security collection body more power to supervise social security contributors, especially when an employer fails to make a complete payment on time and refuses to rectify the situation within the ordered time limits. The new authorities include:

Access to the employer’s deposit account with banks or other financial institutions
Right to deduct the outstanding social security contributions directly from the employer’s bank account(s) upon the approval of relevant administrative authorities
Right to require the employer to provide a warranty in case of his/her bank account balance is insufficient to pay the outstanding social security contributions
Right to apply to the People’s Court to detain, seize and auction off the employer’s assets at the value equal to the outstanding social security contributions and deduct the outstanding amounts from the proceeds of the auction

If an employer fails to conduct social security registration and refuses to rectify the situation within the requested time limits, its directly responsible person(s) will receive a standard penalty ranging from RMB500 to RMB3,000. In addition, the employer will also be subject to a penalty one to three times the outstanding social security contributions, plus a late payment fee of 0.05 percent per day. An employer who fails to declare the correct social insurance contributions shall pay 110 percent of its previous month’s contributions.

SIL’s application to foreign employees: needs clarification
Article 97 of the SIL stipulates that foreign employees in China shall participate in social insurance. However, social insurance funds across different localities are unequally ready for receiving payments from foreigners, the refunding system remains incomplete, and the mandatory request on foreigners is still unclear.

Up to date, Shanghai, Tianjin, and Suzhou have issued regulations stipulating that foreigners and residents of Hong Kong, Macao and Taiwan are entitled to participate in pension, basic medical insurance and work-related injury insurances. Such personnel in the aforementioned regions can apply to deregister their pension and medical insurance when they exit Mainland China after the employment is terminated or dissolved, and obtain the actual balance in their personal pension and medical insurance accounts in one lump sum.

Currently China has signed bilateral agreements with South Korea and Germany for social insurance exemption. Workers from Germany are exempt from pension insurance and unemployment insurance in China for the first 48 calendar months, while those from South Korea are exempt from pension insurance.

Dezan Shira & Associates is one of Asia’s largest independent consulting firms and can advise on issues relating to tax, compliance, and HR in China. For advice on how the new Social Insurance Law will affect you, whether as an individual or as a business operating in China, please visit the firm’s web site at www.dezshira.com or email us at info@dezshira.com.