Let’s consider the options!
Setting up a Group Retirement Plan is one of the best ways to attract and retain talent. It allows your employees to effectively take control of their retirement, ultimately leading to increased productivity and financial wellness.
There are three main types of retirement plans that companies consider: Group Registered Retirement Savings Plans (RRSPs), Deferred Profit-Sharing Plans (DPSPs) and Registered Pension Plans (RPP). All three help employees accumulate retirement savings.
Let’s highlight the differences:
GROUP REGISTERED RETIREMENT SAVINGS PLAN (RRSP)
An RRSP is the most flexible of the three programs, that is devised to encourage individuals to save money for retirement. Primarily, there are two types of RRSP plans, one with employer matching, and one without employer matching. Programs are usually set up on a voluntary basis. i.e., no employer is obligated to participate. That being said, a formal contribution matching incentive can be defined (with employer matching), which would, however, attract payroll taxes and be treated as T4 income for the recipient. This plan is not governed by pension legislation.
Some things to consider:
Employer contributions go to the employee income tax-free and the frequency of the contributions (if the employer decides to contribute) is completely up to the employer.
Employer contributions are vested immediately, meaning should they decide to leave the company, they can take the employer's money with them.
Employees can also direct their bonus dollars into the RRSP, openly avoiding income and payroll taxes.
With Employer matching, employee and employer contributions are tax-deductible to the employee. Whereas, with no employer matching, employee contributions are tax-deductible.
18% of the employee’s previous year's income up to a maximum limit can be contributed by the employee.
Sponsors can constrain in-service withdrawals in case the employees want to access the money while employed. Although, plan provisions do allow withdrawals for CRA’s Home Buyers’ and Lifelong Learning Plans.
Employees can take the money with them when they retire or are terminated, however, the proposition of being taxed depends entirely on how the money is transferred i.e., 100% taxable if withdrawn as cash and, non-taxable if transferred to a registered plan.
DEFERRED PROFIT-SHARING PLAN (DPSP)
A Deferred Profit-Sharing Plan is an employer’s sponsored savings program and somewhat a mix of the RPP and the RRSP. It is formulated to allow employers to distribute profits to their employees according to a defined formula, on a tax-sheltered basis. Any money contributed to the DPSP from the employer does not attract payroll taxes, it is registered with the CRA on accord of tax relief permissibility, therefore no contributions are present in the T4 income.
Some things to consider:
The source of the fund is solely from the employer’s profits, so in the case of a loss, there remains the possibility of no contribution.
The highest an employer can contribute is up to 18% of the employee’s earnings, not exceeding 50% of pension maximum.
The employer can have a vesting schedule of up to 2 years, meaning if the employee leaves prior to being a part of the plan for 2 years, they forfeit the DPSP money (RRSP money is always for the employee).
Any forfeited money is then held in a forfeiture account which can be used towards future contributions.
The only way a shareholder is permitted to participate is if their total equity share of the firm is less than 10%, but their relatives are not allowed to participate either way.
The employer and employee contributions for a shareholder or a connected person would be directed to the RRSP segment of the program.
Employees are not permitted to contribute, and sponsors can constrain in-service withdrawals in case the employees want to access the money while employed.
Employees can take the money with them when they retire or are terminated, however, the proposition of being taxed depends entirely on how the money is transferred i.e., 100% taxable if withdrawn as cash and, non-taxable if transferred to a registered plan.
REGISTERED PENSION PLAN (RPP)
A registered pension plan is the most structured of the three plans. It is a registered retirement plan that requires employer contributions and guarantees savings are used for retirement. The plan is registered with CRA to permit tax relief and is also governed by provincial or federal pension legislation.
Some things to consider:
The employer has to contribute a minimum of 1% monthly, of those who choose to participate in the plan.
Everyone in the same class is required to get the same contribution (classes can be set up based on years of service and job type).
In some cases, such as when employees have had no income in the previous year, they can participate in the contribution.
Owners are permitted to participate if they are shareholders/employees.
Employees are entitled to employer contributions immediately or as per the provincial/federal legislation.
Contributions from the employer avoid additional payroll taxes, however, employee contributions are tax-deductible.
18% of the employee’s current year income up to a maximum limit less employer contributions, can be contributed by the employee.
Required contributions to the program are locked i.e., they cannot be withdrawn until retirement. They must be converted to a payout product in retirement as early as age 55 or as late as age 71 (Life Income Fund or Annuity). Payout maximums from a Life Income Fund are determined each year by provincial governing bodies.
If you have any other questions about Group Retirement Plans and how they can help you and your employees, contact our professionals at info@dkcanada.ca and we will be glad to help you make well-informed decisions.
