Ch 11 - Employer-Sponsored Pension Plans Flashcards
Group RRSP SETTLEMENT OPTIONS
withdraw the funds in a lump sum
purchase an annuity
transfer to RRSP or RRIF
what is a REGISTERED PENSION PLAN
An RPP is a trust registered with CRA and established by an employer to provide pension benefits for its employees
when they retire.
what is the Pension Benefits Standards Act, (PBSA)
Under this Act, the federal government
supervises private pension plans covering federally regulated areas of employment.
what areas of work does the PBSA cover?
banks, airlines, interprovincial and international transportation, and telecommunications
three types of DBPPs:
- Flat benefit plans
- Career average plans
- Final and best average plans
what is a FLAT BENEFIT PLAN?
The flat benefit plan is the simplest type of DBPP. The monthly pension is a fixed dollar amount for each year
of service.
advantage of Flat benefit plan
• easy to understand.
• Plan is funded entirely by the employer.
• Can negotiate and increase benefits
• The pension paid is completely separate from, and in addition to, OAS and CPP or
QPP benefits.
Disadvantages of Flat Benefit Plan
• high-income employees get same amount as low-income employees.
• The amount paid is established in terms of today’s dollar values. the pension payable
at retirement is eroded by inflation.
CAREER AVERAGE PLANS
With a career average plan, the pension is calculated as a percentage of an employee’s earnings over the entire period of service under the plan.
Can change the base year from which average starts to combat inflation
FINAL AND BEST AVERAGE PLANS
plan uses either the final few years of service or the employee’s three to five highest-earning years.
MAXIMUM PENSION BENEFIT
The maximum pension benefit (MPB) allowed is 2% of the recipient’s annual earnings, up to a maximum for each
year of service.
Maximum Pension Benefit for 2020 (example)
$154,611 x 18% = $27,830 / 9 = MPB = $3,092.22
1/9 = money purchase limit
PENSION ADJUSTMENT and its purpose
the amount of contributions made by, or the value of benefits accrued to, a plan member for a calendar year.
The pension adjustment allows plan members to determine the amount they can contribute to an RRSP without exceeding their annual contribution limit for all registered plans combined.
The pension adjustment for a DBPP participant (formula)
(Pension Benefit Entitlement x 9) – $600.
Same formula for IPP*
HYBRID PENSION PLANS
Hybrid pension plans involve elements of both DBPPs and DCPPs.
past service pension adjustment (PSPA).
The difference between the pension adjustment under the old plan
and that under the revised plan
Employers who offer defined benefit plans may upgrade them at times by making additional contributions to an
employee’s plan to provide increased benefits.
GUARANTEE PERIOD - Pension Plan
Pension payments can be guaranteed for the life of the contributor or for a minimum payment period, such as
10 years
options when members of a pension plan leave their employer before retirement
- Keep their pension entitlement within the pension plan
- Transfer out of the plan to another pension plan
- Transfer funds (up to legislated limits) to a LIRA
pooled registered pension plan
DCPP designed for people do not have the option of participating in a pension plan
Usually for small business
Disadvantages of pooled registered pension plan
• require harmonization of regulations
across federal, provincial, and territorial jurisdictions.
• Employers Not required by law to offer them.
• Employers are also not compelled to contribute to a PRPP.
INDIVIDUAL PENSION PLANS
registered DBPP usually established by a company for one employee, who is
often the owner-manager.
This type of plan is designed to maximize the amount of contributions that are permitted by the Income Tax Act.
For who is an individual pension plan suitable?
generally attractive to people between the ages of 40 and 71, who have a T4
income of more than $154,611, which is the maximum pensionable amount for DBPP
two types of IPPs and description
Connected persons plan - designed for owner-managers who own more than 10% of any class of shares of the company
Non-connected persons plan - for persons who are not shareholders or who own less than 10% of the company shares. used
to attract or retain senior management personnel.
RETIREMENT COMPENSATION ARRANGEMENT (RCA)
A retirement compensation arrangement (RCA) allows employers to pre-fund
retirement benefits without using an RPP.
An RCA is a savings arrangement occasionally used by private companies
for their employees’ pension funding.
It is used to fund the portion of an employee’s pension benefit that exceeds
the benefits permitted under a DBPP or DCPP.
What is a supplemental executive retirement plan (SERP)
employers provide members of an RPP with an additional benefit
Advantages of SERP (employee and employer)
employer: use in attracting and retaining
top executives and key employees.
employees: can help fund a retirement plan
that reflects their high salary and accompanying lifestyle.
RRIF withdrawal formula
amount / (90-age)
LOCKED-IN RETIREMENT ACCOUNTS AND LOCKED-IN RRSPs
Transferring the funds to a LIRA or locked-in RRSP allows contributors to manage the assets themselves, rather
than entrusting them to the ex-employer’s pension plan manager.
