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Posted by Jimmy Carbonneau, Group insurance and group annuity plans advisor, June 14 2016
Pension Plan
Pension Plan: gain flexibility through DPSP

Save money with a DPSP

 

It makes sense for businesses to contribute to their employees’ retirement savings, in terms of employee engagement and loyalty, tax benefits for the employer and employees, etc. Various retirement savings vehicles can be used, but the most flexible and currently the most popular with small businesses is unmistakably the deferred profit sharing plan (DPSP). Read on to learn more!

The DPSP only holds employer contributions. Contributing to a DPSP will give the company a tax benefit (as the contribution reduces the taxable income).

This type of plan is quite often provided in conjunction with a Group RRSP that will only hold employee contributions. Why? To save money!

The concept of “employer contributions” is inexistent in a Group RRSP. Should the employer wish to make a tax-sheltered deposit into a Group RRSP, this would have to be in the form of an additional salary that will be transferred to the Group RRSP. The impact will be that both the employer and the employee would then have to pay the applicable payroll taxes (EI, CSST, FSS, QPIP, QPP, etc.) on this additional salary. The extra cost for the employer can often amount to almost 15%.

To avoid such payroll taxes, the employer simply has to contribute to another type of plan, such as the DPSP.

Profit-based employer contributions

A high degree of flexibility is one of the main reasons why DPSPs are so popular. Indeed, the DPSP rules are set by the employer.

The contribution paid by the employer depends on the company’s earnings (annual or retained). Thus, during a year when the earnings are lower, it is possible for businesses to reduce their contribution to employees (or even cancel it in case of a financial loss). Conversely, during an outstanding year, the company can decide to increase its contribution.

This feature of DPSPs is a big plus for a business. When times are hard, the company will get a break and avoid making a bad situation worse. During profitable times, it can reward employees in a tax-efficient manner for everybody.

Also read this previous article on How to reduce your business costs using a third-party administrator.

Vesting

The “vesting period” is the time after which employees own the sums that were deposited in their name.

One of the objectives of contributing to a DPSP is to engage and retain employees by making contributions to their retirement savings. A company doesn’t want employees to leave after a few months. The DPSP is the only retirement savings vehicle that allows the employer to keep the sums paid to an employee who leaves within a 2-year period. Why would a business want to do this? Simply to encourage employees to stay on, and reward them for their years of service. The money thus recovered may be used for future contributions.

The maximum vesting period is 2 years, but several businesses prefer a 6-month or 1-year period.

Withdrawals

When contributing for your employees, you want the contributions to be used for retirement. As an employer, you can forbid withdrawals from a DPSP as long as an employee remains with you. When the employee leaves, the DPSP will simply be converted into an RRSP.

DPSP: A plan in full swing…

As businesses with 20 or more covered employees are required to offer a retirement plan, several companies are debating whether they should make employer contributions to such a plan. For those that will, the DPSP is undoubtedly a highly attractive option providing maximum flexibility.

We now encourage you to contact one of our experts who will guide you toward selecting the type of retirement plan that will best meet your needs.

 

 

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Jimmy brings overs 20 years of experience in pension plans. After starting his pension career at the Ontario Teachers’ Pension Plan, he worked as DC Consultant for a large actuarial firm and two insurance companies before joining AGA. With his extensive pension experience, he has developed an acute expertise in the selection, the design and the implementation of pension plans. Jimmy provides his clients with both expertise and insight on their employee benefits.
Jimmy Carbonneau, Group insurance and group annuity plans advisor