Social insurance

Obligatory insurance

In Germany self-employed businessmen - apart from a few exceptions - are not normally bound to pay social insurance contributions. They have to make provision for themselves. They can take out schemes with private insurance companies to cover ill health or pension arrangements (etc).

Given the complexity of the social security system all that is possible here is a preliminary overview. Statutory regulations and case law change all the time which means that individual queries must always be taken up with the public or private sector insurance providers. In particular, levels and rates of contributions change  constantly as conditions also change.

All employees must take out social insurance cover in accordance with the relevant legislation. Employees up to a predetermined maximum income level must be members of the statutory medical insurance scheme. All employees must also be members of a pension insurance scheme, a social nursing care insurance scheme and an unemployment insurance scheme. Employees and employers each pay half the costs of these statutory social insurance schemes. An employer must pay over contributions into the four social insurance schemes to the appropriate medical insurance scheme.

According to German social security legislation foreigners working in Germany are also liable for social insurance contributions if they are viewed by German law as being employed by their employer (employment, traineeship).

Foreign employees sent from abroad to work are not liable to pay social insurance contributions under German law if they have been sent in the course of an employment under a foreign law and their deployment is a particular feature of the employment in question or is for a limited period of time from the outset (the limit is normally 12 months). In such cases the foreign law applies („adoption“). An EU decree and the various bilateral social security agreements concluded with originating states cover more detailed aspects of these arrangements. General local health insurance offices and the Federal Insurance Scheme for Employees can provide further details.

The following comments apply exclusively to those who have to pay social insurance contributions according to German law.

If an employee’s income does not exceed 400 Euro per month, the employee does not have to pay insurance cover for ill health, nursing care or pension. If an employee’s income exceeds 400 Euro both the employer and the employee must each pay half the amount of contributions for ill health, nursing care, pension and unemployment insurance cover. The employer has exclusive responsibility for deducting and paying these contributions. No contributions towards unemployment insurance cover are payable. No account is then taken of the wage or salary level which may exceed the limits detailed above.

Health insurance

The statutory health insurance scheme does not just cover mandatory members but also includes family members and those insured on a voluntary basis. See § 5 of SGB V for further details of those persons who have to be insured. These include workers, employees and professional trainees who are paid for their work. Dependent employees must take out insurance cover unless they are in casual employment or their regular annual wage or salary does not exceed 75% (currently (2005) 3,525.00 Euro per month) of the income limit up to which contributions are chargeable for statutory pension insurance.

With a few exceptions self-employed persons do not have to subscribe to an insurance scheme. All circumstances are taken into account when reaching a judgement on whether a person is employed or self-employed. The decisive factor in judging someone to be employed is normally work done in return for a wage or salary. For self-employment it is indicative if the individual bears the commercial risk himself or herself and profits and losses by the company have a direct effect on income. Nor can independence always be assumed, even in socalled mixed types such as in the case of shareholders in a company.

Partners / Shareholders

GbR + oHG
In the case of a company constituted under civil law (GbR) or a general commercial partnership (oHG), from the point of view of social security regulations working shareholders are defined as self-employed. In principle they are not under any obligation to take out insurance and are regarded as co-owners. Even if they have management responsibilities and are paid a wage or salary for these, there is still no obligation to insure.

Kommanditgesellschaft (KG)
A limited commercial partnership (KG) has at least one general partner and one limited partner as partners. General partners are fully liable partners. Profits and losses of the business have a direct effect on wages and salaries drawn by the partners. They are therefore deemed to be „self-employed“ and not bound to subscribe to an insurance scheme.

Limited partners are different. If they are employed by the partnership they are categorised as employees and are liable in principle to subscribe to a mandatory insurance scheme. The only exception is if a limited partner is officially appointed by the partners to take over management of the business and is not restricted by the general partners. But limited partners who do not draw a wage or salary commensurate with their work and who share in profits are not bound to subscribe to a mandatory insurance scheme either.

GmbH (Director or Shareholder)

There are various criteria which dictate whether a director of or shareholder in a limited liability company (GmbH) is exempt from insurance obligations or must subscribe to an insurance scheme. What basically has to be determined is whether employment or self-employment is involved. A shareholder is deemed self-employed if he or she has a decisive influence on the economic power of the company.

This is always the case if there is a majority shareholding (at least 50% of the proprietors’ capital). But shareholders with a holding of less than 50% of the proprietors’ capital are also regarded as self-employed if they are directors and are free to take their own decisions.

Aktiengesellschaft (AG)
The regulations governing statutory pension insurance provision state that members or alternate members of the board of a public limited company (AG) are not classified as employees. This means that this category of person is not liable to subscribe to a pension and unemployment insurance scheme. The obligation to subscribe to a health insurance scheme is also unlikely to apply to such persons since they are normally paid in excess of the annual remuneration limit.


Persons who are allowed to join a statutory health insurance scheme on a voluntary basis include those who have been mandatory members but no longer are so and who in the five years prior to leaving have been insured for at least 24 months or who immediately before leaving have been insured for at least 12 months without a break. If a self-employed person has been a member of a statutory health insurance scheme thus providing insurance protection for members of his or her family, such family members continue to be covered when insurance is taken out on a voluntary basis without any increased contributions being payable.

Nursing care insurance

Nursing care insurance is another key element in basic social security provision and is designed to help look after persons who need nursing care. Contributions are levied at the standard Federal rate of 1.7% of gross wages or salary. The income limits up to which contributions are chargeable for statutory health insurance schemes also apply.

In principle all members of statutory health insurance schemes must take out this form of insurance cover. The same applies to members insured on a voluntary basis. However the latter may make an application for exemption within 3 months if they can produce evidence of membership of an equivalent private insurance scheme. This means for example that businessmen enrolled on a voluntary basis can choose between a private or the statutory nursing care insurance scheme. The statutory nursing care insurance scheme includes spouses and children free of charge. By contrast private schemes charge an additional contribution for spouses. However children are also covered free of charge.

Pension insurance

Statutory pension insurance schemes include workers’ insurance schemes, employees’ schemes and miners’ pension insurance schemes. Whereas these pension insurance schemes basically cover everybody with employee status, the self-employed (apart from a few exceptions) have to take out their own form of scheme to provide insurance cover in this respect.

Once you have been in a scheme for 5 years you are entitled to a pension.

Obligation to subscribe to an insurance scheme/exemption

All persons working as employees in return for remuneration must become members of a statutory pension insurance scheme. This also applies to trainees even if they are not entitled to remuneration. Unlike the statutory health insurance schemes there is no income limit up to which contributions are chargeable which when exceeded exempts the person involved from the obligation to insure. The income limit up to which contributions are chargeable for pension insurance - currently 5,200 Euro (West Germany) / 4,400 Euro (East Germany) gross income monthly for 2004 - merely means that contributions at a rate of 19.5% are chargeable up to this income limit. Income over and beyond this is not normally assessed for contribution purposes which means that no pension provisions are made for higher income levels. It is sometimes advisable to take out private schemes to supplement pensions.

Pension Law regulations specify that certain categories of the self-employed including for example craftsmen enrolled in the Roll of Craftsmen must be in an insurance scheme.

Application to join a mandatory insurance scheme

A self-employed person who is not subject to a mandatory insurance scheme can apply to become a member of such a scheme. The same degree of cover is provided as for a self-employed person who is subject to mandatory insurance. An application to join a mandatory insurance scheme must be made within five years of the start of self-employment. Once approved such an application cannot be withdrawn, which means that such a person must remain in the mandatory scheme for the entire period of self-employment.

If such an application to join a mandatory insurance scheme is made, the self-employed person must pay the percentage contribution laid down by the insurance institution (19.5%) just like any employee. If the level of income results in contributions which exceed the standard monthly rate of 470.93 Euro (West) / 395.85 Euro (East), an applicant may opt to limit his or her contributions to the standard rate only. Payments over and above this are possible. No account is then taken of the level of actual income.

In the case of voluntary insurance contributions it is up to the individual to decide on the contribution rate. However the minimum monthly amount is 78 Euro. The maximum limit on voluntary contributions is 1,014.00 Euro. Insurance on this voluntary basis must be applied for by 31.03. of the year following establishment of the company. Voluntary continuation insurance is basically only possible with the insurance institution which has been in receipt of previous contributions.

An individual previously without pension insurance cover can choose between the appropriate workers pension insurance institution and the Federal employees insurance scheme.

Unemployment insurance

The purpose of unemployment insurance is to provide financial security for an employee during periods when he or she is unemployed. Entitlement to unemployment benefits exists subject to the prescribed conditions (unemployment, availability for work) once the qualifying period is over. This is the case if an applicant has been in employment and has paid statutory contributions for at least 12 months in the three years prior to registering as unemployed and applying for benefits.

Basically all workers and employees who work in return for pay and their employers are liable to pay contributions. Contribution levels are assessed on the basis of the employee’s monthly pay level. The current rate is 6.5% payable half by the employer and half by the employee up to the income limit to which contributions are chargeable for pension insurance purposes. For 2005 the relevant figures are 5,200 Euro (West) / 4,400 Euro (East). Contributions are paid in to the appropriate health insurance scheme office.

A businessman cannot subscribe to the unemployment insurance scheme on a voluntary basis.

Statutory accident insurance cover

Statutory accident insurance cover is a mandatory third party liability insurance which employers must take out. The purpose of accident insurance cover is to do everything possible to ensure health and safety at work by avoiding accidents and occupational ailments and exposure to risks in accordance with regulations laid down in the Social Security Code of Practice VII (SGB VII) and to devote all possible resources to restoring employees to god health following such ailments or accidents and to compensate them or their families financially.

An insured party is not only covered for accidents at work. Insurance cover also applies to the journey to and from work. Accident insurance institutions are normally the Trade Associations. There are a total of 27 Trade Associations for the whole of trade and industry, each responsible for the sector(s) which have been allocated to them. The address of the local Trade Association responsible for a particular area can be obtained from the National Association of Commercial Trade Associations based in St. Augustin.

The relevant sector or local Trade Association should be informed within a week of the establishment of a commercial business.

Businessmen who fail to notify the Trade Association or who are not on record will be liable retrospectively to pay their contribution to that body. Even if a businessman is not a member of the relevant Trade Association his or her employees still enjoy insurance cover. Even in these circumstances the owner of a business must file notification of loss or damage immediately. There is a statutory form on which such loss or damage must be notified, a socalled Accident Notification. Accident Notification forms can be obtained from bookshops and from the relevant Trade Association.

Category of persons insured

The category of persons insured is by law all employees and apprentices undergoing basic or further training.

All Trade Associations have their own articles of association which specify whether or not businessmen themselves have to be insured. Approximately half the various types of businessmen are liable to be enrolled in socalled mandatory businessman’s insurance cover.

Businessmen not covered by the above can insure themselves and their working spouses (except for members of family boards) on a voluntary basis provided they do not draw a wage or salary or are already in a mandatory insurance scheme. All businessment would be well advised to take out insurance on a voluntary basis with the Trade Association. Annual premiums are relatively low and the insurance cover provided is considerable, which private insurers cannot match.

Among the advantages for voluntary members - apart from a few exceptions - is that they themselves can determine the sum to be insured within maximum limits independently of their actual income. However the amount of the sum insured should be based broadly on actual income.

Payment of contributions

Trade Associations levy their contributions towards financing their accident insurance schemes annually in arrears. The level of contributions is determined by the amounts paid out by the Trade Association over the previous year. Contributions payable solely by businessmen are calculated in the case of commercial businesses on remuneration (payroll total) for all those insured. However different levels of contribution are charged depending on the risk category to which a particular business is allocated. Risk categories are in turn measured by the degree and severity of accidents at work occurring in individual branches of trade and industry.

Businessmen do not have to keep Trade Associations informed of every employee they hire or fire. All they have to do at the end of the year or the beginning of the following year is notify the total amount of remuneration paid or payable.



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