Upon entering into force, the legislative reform would influence how entrepreneurs’ YEL income is determined and how it is reviewed. The objective is to provide entrepreneurs with more opportunities to choose how their YEL income is determined, while also taking earned income from entrepreneurial activities more strongly into account as the basis for YEL income.
Varma is keeping a close eye on the bill’s parliamentary proceedings, and we are preparing to help you navigate the choices related to the change. We will provide more detailed information about the impacts of the YEL reform as well as any actions required from you well before the act enters into force.
“If you are an entrepreneur with YEL insurance, no actions are required from you at this time. We will advise and assist you in making the necessary choices well in advance,” says Varma’s Senior Vice-President, Pension and Insurance Services, Tarja Syvälä.
Two models for determining YEL income
Under the legislative proposal, you would be able to choose, as the basis for your YEL income, either an overall assessment model similar to the current one, or a new earned income model in which your YEL income would be based on your earned income from entrepreneurial activities.
The choice would affect not only your YEL contribution, but also both your future pension and other social security benefits that are tied to YEL income.
Overall assessment model
In the overall assessment model, the principle for determining YEL income would be similar to the current model, i.e. an estimate of the monetary value of your work input. Your YEL income should correspond to the salary that would be paid to an equally skilled person to perform your work.
Your earned income from entrepreneurial activities is also significant in the overall assessment model, as your YEL income should ultimately, after the transition period, be at least 50 per cent of your earned income from entrepreneurial activities. In 2028, your YEL income should be at least 30 per cent of your earned income; thereafter, this percentage would rise annually by five percentage points, reaching 50 per cent in 2032. The pension insurance company would review your earned income annually.
Earned income model
In the earned income model, the basis for your YEL income would be the most up-to-date information possible on the earned income from your entrepreneurial activities. As a rule, the earned income data based on your entrepreneurial activities obtained from the Incomes Register would be used for this, covering the 12 months prior to the month before the month in which your YEL income is determined.
If your earned income data were only partially available in the Incomes Register, a combination of Incomes Register data and data from your most recently finalised tax assessment would be used to determine your YEL income. This approach could be used, for example, if you pursue entrepreneurial activities in several different business forms.
If the necessary data were not in the Incomes Register, your YEL income would be based on your most recently finalised tax data.
In practice, the goal of the model is to link your YEL income more directly than currently to the earned income you receive from your entrepreneurial activities. For you this would mean, among other things, that if the earned income from your entrepreneurial activities varies significantly from year to year, your YEL income and YEL contributions would also vary annually. However, the final impacts would depend on your situation.
The pension insurance company annually reviews the entrepreneur’s earned income also in the earned income model. Changes made in the review would take effect at the start of the year following the review year.
When and how can you choose a new model on which to base your YEL income?
According to the legislative proposal, you would be able request information from Varma as of 1 January 2028 in order to compare options and choose your YEL income basis. Your choice and your new YEL income would only take effect on 1 April 2028, however.
If you did not request information or make a choice, an annual earned income review would be conducted on your YEL income. The information for choosing your YEL income basis would be provided to you in the third year after your YEL income was last confirmed.
Once it becomes possible to compare the options, we will inform you which data are used in the calculations and how the different choices will affect you. We will inform you about the time frame for making the choices and all practical matters at the latest when the law has been approved and its final content is known.
"Many entrepreneurs may be wondering in particular how the reform will affect their YEL contributions. However, there is no simple answer to this, as the impacts will depend on the entrepreneur’s personal situation and which model they choose as the basis for their YEL income. We will help in making the choices and provide information about all the options and their impacts at the appropriate time,” says Syvälä.
Tarja Syvälä, Head of Insurance Services at Varma, emphasizes that entrepreneurs can confidently wait for the legislative process to move forward. Varma’s experts will provide advice and support in making the necessary choices well in advance.
How is a new entrepreneur’s YEL income determined?
A new entrepreneur refers to a person who has no prior YEL-insured entrepreneurial activities, or whose previous entrepreneurial activities took place so long ago that the required earned income data is not available from the Incomes Register or from their most recently finalised tax assessment.
As a new entrepreneur, you would estimate the earned income from your entrepreneurial activities yourself. Your estimate would be used until your actual earned income data becomes available from the Incomes Register or your tax assessment.
The discount for new entrepreneurs will be discontinued
Under the proposed legislative reform, the discount on new entrepreneurs’ YEL contributions would be discontinued. If you were granted a discount for new entrepreneurs before the reform takes effect, it would nevertheless remain valid unless you choose to waive it.
However, continuing the discount would affect your available options:
- your YEL income would always be determined in accordance with the overall assessment model, and you would not have the option to choose the earned income model;
- an annual earned income review would be conducted on your YEL income;
- you would not be able to use the flexibility option for YEL contributions, meaning you could not temporarily pay lower or higher YEL contributions.
As a new entrepreneur, you should therefore assess whether continuing the discount for new entrepreneurs or using the other options offered by the reform is more appropriate for your situation. We will help you understand the options and their impacts.
In certain situations, a YEL insurance policy can be terminated for a period of sickness or family leave
Under the proposed legislation, you could terminate your YEL insurance if you have been granted sickness or parental allowance for at least three months, and as a result, the value of your work input falls below the minimum limit for the obligation to take out insurance.
If your YEL insurance were to start again within a year of its termination, your YEL income would, as a rule, be confirmed at its previous level. YEL income could be confirmed at a different level than previously for a specific reason. The goal would be to make reinstating the insurance simpler than it currently is after a period of sickness and family leave.
Do entrepreneurs need to do something now?
The parliamentary proceedings on the legislative proposal do not yet require any action from you. The current YEL legislation and your valid YEL income remain unchanged at this stage.
The Parliament may still amend the bill during the process. We will monitor the progress of the bill and inform you well in advance about the impacts of the reform, such as:
- when you can choose which model to base your YEL income on;
- what information is used in comparing the options;
- how the choice will affect your YEL contribution as well as your pension and social security;
- what you, as a new entrepreneur, should consider in terms of continuing the discount for new entrepreneurs;
- when the change requires your attention and action.
Our goal is to make the change as clear and easy for you as possible and to help you assess the options based on your personal situation.
Glossary
YEL income
YEL income is the amount of earned income that serves as the basis for the entrepreneur’s insurance under the Self-employed Persons’ Pensions Act (YEL). It is used to determine not only the person’s YEL contributions but also, for instance, their future pension as well as sickness and parental allowances. Under the proposed legislation, YEL income could be determined in one of two ways: through an overall assessment of work input, or based on the earned income from entrepreneurial activities.
Basis for determining YEL income
This refers to how the entrepreneur’s YEL income is determined. Under the reformed legislation, the entrepreneur would be able to choose from two options: the overall assessment model or the earned income model.
Overall assessment model
This is similar to the current method of determining YEL income, whereby YEL income is based on an estimate of the monetary value of the entrepreneur’s work input. YEL income that is based on an overall assessment must be at least 50 per cent of the earned income from entrepreneurial activities.
Earned income model
This is a new option, in which YEL income is based on the earned income from entrepreneurial activities.
Earned income from entrepreneurial activities
This is the income earned from entrepreneurial activities, which has been reported to the Incomes Register or established in the entrepreneur’s most recently finalised tax assessment, excluding earned income dividends.
Earned income review
An annual review to compare an entrepreneur’s YEL income against their actual earned income data.
Incomes Register
An electronic database to which information on paid salaries and wages, pensions and benefits is reported. According to the legislative proposal, data from the Incomes Register would be utilised in both models to determine YEL income.
Flexibility in YEL contributions
The possibility to pay higher or lower YEL contributions than usual in certain circumstances.
New entrepreneur discount
A discount granted on the YEL contributions of new entrepreneurs; under the proposed legislation, the discount would be discontinued. However, if a new entrepreneur received the discount before the law takes effect, it would remain valid unless the entrepreneur chooses to waive it.
Wage coefficient
A statutory index used to adjust YEL income annually.