11 - Employer Sponsored Pension Plans Flashcards
How are group RRSP contributions taxed
They are a taxable benefit, included as income
Both employee and employer contributions are deductible on tax return
How does vesting work in group RRSP
No vesting on employee portion, can be withdrawn anytime
Employer portion can be locked in
Are group RRSP under pension legislation
No, tax legislation
Settlement options for group RRSP when employ leaves. 3
Lump sum
Purchase annuity
Transfer to RRSP/ RIF
How are contributions taxed on contributory DBPP/DCPP
Contributions are deductible to employer same way salary is
Employee contribution is deductible if made by Dec 31
DBPP flat benefit plan
A plan of $x per month per year of service
Advantage of flat benefit DBPP
Easy
Usually funded all by employer
Disadvantage of flat benefit DBPP
Not based on income
Amount paid is based on today dollars
Career average DBPP
Average over full employment, employee may contribute fixed percentage. Ie 5%
Percentage x average monthly earning x years of service
Advantages of career average DBPP
Most employers update base year
Disadvantages of career average DBPP
May be eroded by inflation if base year not updated enough
Advantages of best average DBPP
Better inflation protection
Disadvantage of best years DBPP
Problem if earnings decline towards retirement
What is maximum earned income
$170kl
Maximum amount that one can earn without being limited by the money purchase limit for RRSP withdrawals
$151,278 x 18%
Money purchase limit
Maximum contribution amount
Maximum earned income x 18%
Maximum pension benefit formula
Maximum earned income x 18% / 9
The maximum pension benefit for employees who earn more than the maximum earned income is limited to
The maximum pension benefit
How are employee contributions regulated in DBPP
Lesser of 2
Actuary determined
Restricted to lesser of 2
- 9% of employee annual compensation
- $1000, plus 70% of employees pension adjustment
Formula for pension adjustment for DBPP
(Pension benefit entitlement x 9) - 600
Pension benefit entitlement. Ie $151,278 x 2%
What is the money purchase plan amount
Ie. 151,278 x 18%
Limitations that prevent benefits from exceeding the lesser or 2 amounts
2% x service max 35 years
$2000 x service max 35 years
Pension adjustment for DCPP
Total employee and employer contribution
Contribution limit for DCPP
Lesser of:
18% of annual compensation
Money purchase plan contribution limit
Past service pension adjustment
Difference between the pension adjustment under the old plan and that under the updated plan
Pension adjustment reversal PAR
Restore RRSP contribution room when a plan member terminates his membership in a RPP or a DPSP
When is an employee eligible for PAR
When membership is terminated not employment
DBPP PAR is the difference between
Cumulative PAs and PSPAs earned to termination of membership
Commuted value of benefits
*reversal must be reported by 60 days
Problem with transferring pension to a LIRA
Only portion of commuted value can be transferred,remaining has to be contributed to an RRSP if they have contribution room
What is a PRPP
Pooled registered pension plan
Like DCPP, but for self employed or employed with no pension plan available
Who administers PRPP
Banks and insurance companies
6 advantages of PRPP
Pooled so lower administrative costs
Investment options
No need for employee employer relationship ie self employed
Portable
Deductible contributions
Grow tax free like RRSP
3 disadvantage of PRPP
To be affective need harmonized between provincial and federal
Employer not required to offer them
Employers not compelled to contribute
Criteria to participate in PRPP 4
SIN
Employed/ self employed in North
Work in federally regulated industry for employer who participates
Live in province with required provincial legislation
Employer contribution to PRPP
Not included as employee income
Deductible by employer
*must fit in employee contribution room
How are withdrawals from PRPP treated
As locked in.
*provinces need to come up with their own rules
What is an IPP
Individual pension plan
Registered DBPP for usually one main person
2 types of IPP
Connected - owner / manager who owned more than 10%
Non-connected
** not available if not incorporate **
RRSP contributions for IPP
Can accumulate an annual pension equal to 2% of average earnings each year
Higher than RRSP contribution
Contribution amount increases with age
Can go back to when person was hired
How are contributions treated for IPP
Contributions and costs are deducted by the company and are not subject to payroll tax
Transfer of ipp assets in death
Can be transferred to person other than spouse tax free if they are plan members of IPP
Pension adjustment calculations
Multiply value of pension benefit earned from ipp in calendar year by9
Then,subtract pension adjustment offset of $600 (I.e. 9 x the benefit - $600
What is RCA and who is it for
Retirement compensation arrangement
Fund benefits over DCPP/ DBPP, a taxable trust set up by employer, does not take contribution room
For owners of private corporations making over $151k
What can be invested in RCA
Wide variety, not managed by income tax act.
Including tax exempt life insurance products, deferred annuity
How does CRA account structure work
2 parts investment and refundable tax account
Half of all earnings go to tax account, no preference for dividends etc
Every year with tax return 50% gets paid to CRA, MUST FILE ANNUAL TAXES
How are benefits paid out of RCA
50 cents for every dollar paid out goes to custodian
Tax is paid at beneficiaries marginal tax rate
Best benefit of RCA
Executives who plan to leave Canada after retirement, subject to non resident tax of 25%
What is a supplemental executive retirement plan. SERP
Can be DBPP or DCPP
Not registered, so no deduction for employer until employee receives benefit
Problem with SERP
CRA can start taxing ahead if they feel it is salary deferral
LIF maximum is the greater of
Withdrawal percentage factor
Previous years return on LIF investment
What is an LRIF
LIF from Newfoundland and Labrador
Saskatchewan and Manitoba have PRIFs. They have no max
