DEFINED CONTRIBUTION RETIREMENT PLANS The and of Defined Contribution Pension Plans, Deferred Profit Sharing Plans and Group RRSP Plans
DEFINED CONTRIBUTION PENSION PLAN 1. Employer has more control than with a Group RRSP and can therefore ensure the plan operates as a true retirement plan. 2. Employer contributions do not attract payroll taxes. 3. Administration fees paid by the employer are not a taxable benefit to the employees and are a tax deductible business expense to the company. 4. A maximum vesting schedule of 2 years of plan membership is allowed (forfeited benefits can revert to the employer and reduce annual contribution costs). 5. Lock-in legislation provides confidence to employers that their employees will have a source of income during their retirement. 6. In-service withdrawals of employee & employer required contributions by plan members, is not allowed. 7. Employees may make additional voluntary contributions. Such contributions are excluded from the lock-in provisions of the plan and in-service withdrawals are allowed on these contributions. 8. Death benefits from both spousal and non-spousal beneficiaries can be rolled to an RRSP. 1. Legislation can be viewed as restrictive, i.e. part-time employees must be allowed to join; all members within same employee classification must receive the same contributions, etc. 2. Lock-in rules are sometimes a source of irritation to employers and employees. 3. Government regulation requires annual registration fees and additional reporting requirements including annual external audits once a plan reaches a certain size. This work can result in significantly higher administration costs. 4. The plan sponsor is required to contribute a minimum of 1% of annual earnings on behalf of plan members.
GROUP R.R.S.P (Assumes Both Employee and Employer Contributions) 1. Not subject to pension legislation thus the employer has much broader flexibility in tailoring the plan s rules to suit the company s needs. 2. There are no legal restrictions on eligibility, contribution flexibility by member, etc... 3. Maximum flexibility for the payout of plan proceeds, i.e. cash, rollover to an RRSP or RRIF, term annuity or life annuity. 4. Many employees prefer that funds are not locked-in upon termination. 5. Spousal accounts are allowed to assist couples with splitting their retirement income. 6. Employers have more flexibility in the timing of remitting their contributions, i.e. monthly, quarterly, annually or periodically. 7. No government reporting (service provider issues tax receipts for plan members). 8. May be purely voluntary plan or an employer contribution can be included. 1. The employer cannot ensure their contributions will be used to provide ongoing retirement income. 2. All company contributions vest immediately with the employee. 3. Administration fees paid by the employer are a taxable benefit to the employee; however, they re a deductible business expense. 4. Employer contributions are considered additional salary for tax purposes. They are subject to source taxes including: CPP, UIC, EHT, Worker s Compensation, etc... (An example of the potential cost impact of this aspect is included at the end of this document).
GROUP D.P.S.P. (Employer Contributions to Group DPSP) 1. Employer contributions do not attract payroll taxes. 2. Administration fees paid by the employer are not a taxable benefit to the employee. However, they are a deductible business expense. 3. No provincial legislation employer has more flexibility than with RPP. 4. Some requirements determined by Canada Revenue Agency (CRA) in order to qualify. 5. No restrictions on eligibility or timing of employer deposits except at year end. 6. Members have maximum flexibility on termination, death or retirement. All assets can be taken in cash or transferred to a RRSP/RRIF or to purchase an annuity. Contributions aren t locked-in. 7. Limited government reporting (CRA filing plus T4 fields). 8. Employer retains control while avoiding the more restrictive pension legislation. 9. All employer contributions must be vested within two years of membership. 10. Employer can restrict employee in-service withdrawals on the DPSP. 11. A DPSP is generally used in conjunction with a group RRSP plan. Contributions to the DPSP may or may not be tied to employee contributions into the RRSP. 1. No employee contributions allowed to a DPSP. 2. Must be a for-profit corporation. 3. No connected persons can join the DPSP. ( Connected persons refers to those with 10 percent or greater ownership and non-arms-length family members/relatives. See CRA definition for specifics.) 4. Slightly higher administration cost. 5. The employer cannot ensure their contributions will be used to provide ongoing retirement income.
ILLUSTRATION of PAYROLL TAX SAVINGS of RPP or DPSP vs. RRSP If employer contributions are directed to an RRSP they must be reported as a taxable benefit. From an employee perspective, the tax effect is neutral as the employee will receive a tax receipt for their contributions as well as for the employers contribution. However, from the employer perspective, the taxable benefit amounts will also attract all standard payroll taxes. The following example shows the cost of this. All or most of these additional payroll taxes can be avoided by redirecting employer contributions to a DPSP or an RPP. Example The company contributes 5% of employees salaries into a Group RRSP. 75 employees Average earnings $30,000 Total payroll of $2,250,000 5% of company contribution = $112,500 The applicable payroll taxes are: $112,500 X 1.95% Employee Health Tax = $2,193.75 $112,500 X 4.3% Worker s Compensation = $4,838.00* $112,500 X 4.95% Canada Pension Plan = $5,568.75** $112,500 X 2.77% Employment Insurance = $3,116.25 Total = $15,716.75 * Will depend on company s assessed rate. ** Assumes employees earn less than YMPE. In this example an additional $15,716.75 will be paid in payroll taxes. This represents an additional cost of 14% above the expense of the employer contributions. All or most of this amount could be saved if company contributions are deposited into a DPSP or RPP.