There are basically four areas of corporate policy which relate to DEATH, DISABILITY, MEDICAL/DENTAL and RETIREMENT. For most Canadian employers, the corporate policy (i.e. a group insurance plan) covers the first three.

Retirement is something that each of us cannot avoid. How we live when we retire depends on what we do today. In any form of retirement plan, all contributions will accumulate tax-sheltered to eventually provide a monthly income at retirement. Currently, “normal retirement” is age 65, however, for those who plan ahead and contribute over and above that of the employer, the employee can then have the option to retire at age 55 or earlier in some cases.

When any employer is considering a retirement program that will provide long service employees with a future retirement income, the question is now raised as to “what type of plan will best suit our needs?” First, we must define two key words that are used extensively in the retirement arena; vesting - the amount of time after which an employee is entitled to the employers contributions, and locked-in - the amount of time after which employee and employer monies cannot be withdrawn in cash.

What are the alternatives?

1. Group Registered Retirement Savings Plan - (GRRSP)
2. Registered Pension Plan - (RPP)
3. Deferred Profit Sharing Plan - (DPSP)
4. Combination of the above

The Group RRSP

The easiest program to establish is a Group RRSP. Here, all eligible employees would have RRSP deductions from each pay period. The employer can set a minimum requirement if desired. The employer would match contributions into the RRSP on either a monthly or yearly basis. For a GRRSP, contributions are immediately vested, meaning that an employee has immediate access to the money. They can either transfer or cash the RRSP whenever they wish, without even terminating employment.

Many employers use this form of retirement plan as it is very simple and they feel confident that staff will not deteriorate their retirement by withdrawing from the RRSP.

At retirement, the accumulated value in the RRSP can be transferred into a Registered Retirement Income Fund (RRIF) or Annuity to begin receiving a monthly income. The individual can also make partial/full withdrawals any time they wish. Age has no bearing as to how early they withdraw the funds. However, the person must begin drawing on their money prior to age 71. Any contribution that an employer makes to an employee’s RRSP is considered bonus income and must be included on the employee’s T4. This, in some instances, will increase the contributions to Canada Pension Plan (CPP), Employment Insurance (EI) as well as payroll tax.

Decision: What level of control do you (the employer) desire? What flexibility do you wish to give to your staff with regards to cashing out the company contributions?

The Registered Pension Plan (RPP)

In an RPP, eligible employees would have pension deductions from each pay period. A contribution requirement (e.g. five per cent of gross earnings) would be determined. The employer would match contributions into the RPP on a monthly basis. Under current pension legislation, employer contributions must be fully vested upon two years of plan membership. Many employers use this form of retirement plan as it gives the employer control in that only employees who remains employed for more than two years will benefit from the plan. This promotes retention of staff. As well, all pension contributions (both employee and employer) are locked-in after two years of plan membership. Money can be accessed upon turning age 55.

At retirement, the accumulated value in the pension can be transferred into an Annuity or Life Income Fund to begin receiving a monthly income. Should an employee terminate employment prior to being vested, the employee has the option of either cashing out his/her contributions or transferring them to an RRSP. If the employee was vested, both the employee and employer contributions would be required to be transferred to a Locked-In Retirement Account (LIRA). Employer contributions are included on the employee’s T4 in the form of a Pension Adjustment (PA). In a money purchase form of pension plan, both of the employee and employer contributions would be the pension adjustment. The PA is used when calculating the leftover room for purchasing RRSP’s.

Decision: Is this the level of control you desire? Does this provide your employee enough flexibility upon termination of retirement?

The Deferred Profit Sharing Plan (DPSP)

The next option is a DPSP, however, legislation does not allow employees to contribute to a DPSP. Eligible employees would have RRSP deductions from each pay period; the employer can set a minimum requirement if desired. The employer would match contributions into the DPSP on either a monthly or yearly basis.

Current legislation requires that an employee be vested upon completion of two years of plan membership. Many employers use this form of retirement plan as it provides them with some control with regards to company contributions. Under a DPSP, contributions are never locked-in. At retirement, the accumulated value in the DPSP can be transferred into a RRIF or Annuity to begin receiving a monthly income. The individual must begin drawing on their money prior to age 71. Upon termination of employment, the individual can transfer the vested money to an RRSP for accumulation until retirement. However, they may also make a partial/full withdrawal.

Employer contributions are included on the employees T4 in the form of PA. In a DPSP, the employer contributions to the plan would be the pension adjustment. The PA is used when calculating the leftover room for purchasing RRSPs.

Decision: Is this the level of control you desire? Is this the amount of flexibility you wish to give your staff?

Any of the above methods can be combined to meet the objectives of a retirement program. It all depends on the level of control and the amount of flexibility you wish to provide to your employees. If you are considering establishing a retirement program for your employees, we will work with you to assist you in establishing the plan and ensuring it meets your needs.

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