Upping the employee benefit game

DPSPs, Group RRSPs, and IPPs

In today’s highly competitive labor market, employers have been upping their game to attract and keep the best talent. Offering lucrative group benefits for employees and premium pension benefits for executives as part of an enhanced compensation package offers the most flexibility for employees and the lowest costs for employers. Here’s a summary of the most popular benefits and plans.

Deferred Profit Sharing Plans

A DPSP is a type of registered pension plan funded solely by the employer, and is based on the profitability of the business. The employer makes contributions to the plan if there are profits to share. And employees can decide how the funds are invested. Growth in the plan is not taxable until the money is withdrawn. For the employer, contributions are made from pre-tax income, are tax-deductible, and are not subject to either federal or provincial payroll withholding tax or EI and CPP/QPP deductions.

For employees, one drawback is that employer contributions can be unpredictable, and may be cancelled at any time. In addition, the benefit is not guaranteed. Moreover, RRSP contribution room is cut by the amount of the previous year’s DPSP contribution. DPSPs also allow for vesting up to two years – if an employee leaves the firm before the vesting period, the employer keeps the money.

DPSPs are often used alongside Group Registered Retirement Savings Plan.

Group RRSPs

These Registered Retirement Savings Plans are administered by the employer and are usually managed by institutional pension fund managers. Depending on the plan, there may be some choice in the type of investments or portfolios to choose, but generally employees won’t be able to trade individual securities.

The administrative costs of Group RRSPs are negligible and are often non-existent for the employee. Minimum deposits are low, and the administrator will take care of all the tax reporting paperwork. If an employee leaves the company, their proceeds from the Group RRSP can be transferred to their individual plan or to a Registered Retirement Income Fund or annuity if they are at or close to retirement age.

The main drawback to Group RRSPs is that employees may have only limited rights to withdraw funds from the plan while remaining with the employer. The employer may also cancel the plan at any time, transferring the proceeds to the employee’s as cash or as RRSP or RRIF contributions, or annuity.

Individual Pension Plan

An Individual Pension Plan (IPP) is basically a defined benefit registered pension plan for a single employee rather than a group. The plan pays out benefits based on a percentage of the beneficiary’s prior annual employment income, and payments and funding are governed by the terms of the plan. An IPP must be set up and funded by a corporation. They are regulated by the government and must follow precisely specified rules, just like any other pension plan.

The major attraction of an IPP is that the allowable contribution limit is typically much higher than for an RRSP. High bracket earners (at least $120,000 a year of taxable income), who are 15 to 20 years from retirement, can thus accumulate a much larger nest egg than they would be able to through an individual RRSP.

Because they are much like registered pension plans, IPPs are subject to stricter investment standards and rules governing set-up, maintenance, funding, and payout. They are mostly professionally managed, with contributions actuarially determined to provide sufficient income at retirement. Contributed funds are locked in until retirement.

DPSPs, Group RRSPs, and IPPs are not do-it-yourself types of products for employers, who will need the help of a qualified financial professional to set up and administer the plans, to ensure they meet regulatory requirements for contributions, holdings, and reporting. For employees, there’s very little downside to these types of plans as part of a richer compensation package. Speak to your financial advisor if you have questions on how these plans will integrate with your existing personal RRSPs and TFSAs.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.