Pension and Retirement Solutions
Employee pension and retirement solutions are a core element of complete compensation packages. As workforces evolve, employers offer these packages to staff in addition to their salary and group health benefits to provide competitive compensation packages that attract and retain top talent in your company.
At Gifford Carr, we understand that a group pension plan or retirement solutions are investments in your workforce and your business. It demonstrates a commitment to employee well-being, which helps individuals exit the workforce at a time appropriate for the employee while creating new and exciting growth opportunities for junior staff. Additionally, these elements can provide advantages such as decreased absenteeism related to financial stress, so employees can focus on productivity rather than if they can afford to retire.
What is a pension plan?
An employer-sponsored pension plan is an arrangement that ensures a source of income post-retirement. It works by either the employer, the employee, or both, making regular contributions to the plan. Employees cannot access these funds until retirement, upon which the accumulated funds will provide the employee with an income source.
There are two main types of pension plans:
- Defined benefit plans
- Defined benefit plans
Retirement solutions
Retirement solutions are also built for retirement income; however, they offer more flexibility in the shorter term if individuals leave the company. For employers who do not wish to implement a pension plan, there are several retirement solutions to offer your workforce. These include:
- Group Registered Retirement Savings Plan (RRSP)
- Group Deferred Profit Sharing Plan (DPSP)
- Group Tax-Free Savings Account (TFSA)
Group RRSPs
A group Registered Retirement Savings Plan (group RRSP) is an employer-sponsored retirement savings plan. With a group RRSP, employees open an individual RRSP account and fund it through contributions deducted directly from their paycheque, providing a tax-saving benefit that reduces their taxable income per pay. Additionally, an employer may also make contributions on behalf of the employee.
Group DPSPs
A deferred profit-sharing plan (DPSP) is an employer-sponsored profit-sharing plan on record with the Canada Revenue Agency (CRA). The primary purpose of a DPSP is to facilitate the distribution of business profits among employees. Employers can offer the DPSP for all employees or a specific group of employees. However, individuals who own 10% or more of the company are ineligible to participate.
To register the DPSP with the CRA the plan must satisfy specific criteria outlined in the Income Tax Act. Contributions to a DPSP are reported on the employee’s T4 and reduce their RRSP contribution room in the year they are made. DPSP contributions bypass payroll, meaning that DPSP contributions do not attract source deductions (i.e. employment insurance, CPP.) Employers are entitled to claim a tax deduction for the contributions made to a DPSP.
Additionally, DPSPs are the only vehicles left in Canada with a vesting period.
Group TFSAs
A group tax-free savings account (group TFSA) operates just as an individual TFSA would in that employees can set money aside tax-free during their lifetime. The difference is that employees sign on to the TFSA through a group policy, which provides the same access to resources, and funds, and often lowers investment management fees. While Group TFSAs are typically not funded by the employer, they still harness the group policy’s bulk buying power.
Tax deductions do not apply to contributions made towards a TFSA, and both the contributed amount and any growth generated through the account, such as capital gains and investment income, are typically exempt from taxation, even upon withdrawal.
FAQ
What's the difference between a pension plan and a group RRSP?
A pension plan must meet formal documentation and annual legislative requirements (such as filings) with the regulator and are subject to applicable fees.
A group RRSP is a lower-cost method of obtaining a similar result for the employee but is federally regulated, vs. the pension plan that is provincially regulated and often provides greater flexibility.
Can employees with a personal RRSP or TFSA participate in the group plan?
Yes, you can have multiple RRSP and TFSA accounts at various financial institutions; however, it is the employee’s responsibility to; monitor, maintain, and adhere to the annual contribution limits.
When can retirement solutions be implemented?
Pension plans and retirement solutions can be implemented at any point in time during a calendar year.
How do you decide between a pension plan or retirement solution?
This largely depends on several factors, including the benefit you wish to extend to employees, if there is a union and the benefit to the company. To discuss your options further and provide a custom plan, connect with the Gifford Carr team.
