UNIT 3- EMPLOYER sponsored Pension Plans Flashcards
Defined CONTRIBUTION RPP’s
- contribution from employer + employee known upfront
- Retirement BENEFIT not known (at end)
- at retirement- used to buy Life annuity or trf to LIF
- also called Money purchase
- no risk to empployer
Contribution Levels
- employer/employee- 5%
- employee can choose amt to contribute and employer matches
- Max COMBINED contribution= 18% earnings + current money purchase contribution limit
Past service contributions
??
Projection of Pension Income
Pensionable earnings
- contributions based on pensionable earnings
+ contribution rate of employee/employer
Integration w/ CPP/QPP
reducing contributions by 3.6 of YMPE
Annual Pension Income
capital X rate per $1000
Tax treatment of Defined contribution Plans
- contribution from employer TAX DEDUCTIBLE to EMPLOYER + NOT taxable income to emplpyee
- EMPLOYEE contributions TAX DEDCUTIBLE to employee
- Investments earned in fund TAX DEFERRED
Max Contribution to Defined CONTRIBUTION PLAN
LESSER OF:
- 18% X Pensionable earnings
- Money purchase limit specified
-contributions to DCP reduce RRSP cont. limit
Defined BENEFIT pension Plan
any plan that defines AMOUNT of pension BENEFIT payable at retirement
- if employee contributions required- fixed % of earnings
- employer MUST contribute enough to ensure pension will be enough at retirement
Types of defined Benefit Plans
- Career average
- Final + best earnings
- Flat benefit
DBP- Career average Pension Plan + Formulas
-Amt of pension benefit at retirement avg of earnings over career and years of service
[(pensionable earnings X unit %) x years member of plan)]
OR
[(Avg earnings X unit %) X Years member of plan)]
BDP- Final and best earnings + formulas
-Final earnings plan: Unit % applied avg final 3-5 yrs
[(avg final earnings X Unit %) X Years of credited Service
-Best earnings plan: Unit % applied to avg of best 3-5 yrs or earlier 3-5 years
[(avg best earnings X unit %) X years of credited service)]
DBP- Flat benefit Pension Plans + Formula
-Flat rate Benefit Pension Plan
-available to those w/ min # years service
[(flat rate x yrs of service)]
-reduced proportionally to those w/ less service
[(yrs of service / Req years of service) X Flat Rate
DBP-Contributory plan
If employee required to contribute
DBP-contributory earnings
earnins subject to pension contribution (not same as income)
DBP-Integrated Pension Plan + formula
- integrates CPP/QPP benefits
- stepped contributions for those already contributing to CPP/QPP
- lower rate on earnings below YMPE
- Higher rate on earnings above YMPE
Cont. rate on amts UP TO YMPE X YMPE
+
Cont. rate on amts ABOVE YMPE X (earnings -YMPE)
DBP-Past Service Contributions
- If plan requires members to have min 5 yrs emp to join plan- may give new member option to buy credits for past service
- ???
- ??
DBP-EMPLOYER Contribution Levels
Usually fixed % of earnings
- knows how much to contribute
- knows how pension entitlement will be calculated at retirement
-employer MUST contribute enough to ensure will be enough pension at retirement
Tax treatment of contributions
contributins MAY be deducted when calculating Taxable income of Contributor
Max Pension Benefits
??
Comparion of DCP and DBP
–LATER
DBP- unreduced early retirement pension
- may be eligible if within 10 years of NRA and either:
1. age + yrs of qualifying service (qualifying factor) at least 90 for NRA and 85 for NRA 60
OR
2. Have at least 30 years of qualifying service
unreduced early retirement calculation
(age joined plan + QF) / 2
or?
unreduced early retirement age - current age
Qualifying factor calculation
Age + qualifying years of service
Locked in
if terminated- can’t refund of contributions
Pensionable earnings
earnings that are eligible for inclusion in determining annual pension income at retirement
- not incl: bonuses, OT, taxable benefits
- not same as earned income
DBP Age at which pensions start
current age + projected additional years of service
Years of service expected at retirement
Current yrs service + Projected additional years of service
Indexation of annual Pension Income
- % of CPI
CPI X indexation rate
Years Max Pensionable Earnings (YMPE)
- YMPE is what CPP/QPP based on
- determines max annual contribution to CPP/QPP
- used to determine Pension Benefits in DBP
DBP Percentage of pensionable Earnings for years of service
-used to determoine size of pension benefit at retirement
Average Final pensionable Earnings
-pensionable earnings for last years of employment OR Earnings over # years specified in # yrs avg for final pensionable earnings
Average Pensionable Earnings formula
yr1 + yr2 + yr3 + yr4 + yr5 / 5yrs
Annual Pension Income at retirement
Step 1: Amount for earnings UNDER YMPE:
% of pensionable earnings UNDER YMPE X Pensionable earnings at retirement up to the avg YMPE
Step 2: Amount of earnings ABOVE YMPE:
Specified % of pensionable earnings ABOVE YMPE X
(Pensionable earnings at retirement - Avg YMPE at retirement)
ADD STEP 1 AND STEP 2, THEN:
STEP 3: annual Pension Income:
( TOTAL step 1 +2)
X years of service
Annual pension income at retirement
??
Individual Pension Plan (IPP)
- EMPLOYER sponsored Defined Benefit Registered Pension Plan
- referred to as RRSP upgrade b/c tax reductions and higher pension benefits
IPP specified Individuals
-significant connected individuals- s/h with minimum 10% shares, and not at arms length with employer
OR
- Other highly paid employees (more than 2.5x YMPE)
Suitability of IPP’s- good for:
- owner/manager, executive of incorporated biz, a professional not allowed to incorporate ?
- steady income
- min age between 40-45 (b/c less time to accumulate funds to reach retirement income)
- earnings $100,000 or more
- Max RRSP each year
IPP pension benefits
- IPP is defined benefit plan
-KNOWN level of income at retirement
-based on career avg earninings
-
IPP Contribution levels
contributions based on :
- age
- employment earnings
- actuarial valuation reports
IPP contribution Level formulas (2)
Pensionable Earnings [(LESSER OF (dollar limit for this year / benefit rate) and salary
Maximum Benefit [(Pensionable earning X Maximum benefit rate)]
IPP cont level formula- Pensionable earnings
[(LESSER OF (dollar limit for this year / benefit rate) and salary
IPP cont level formula- Maximum Benefit
[(Pensionable earning X Maximum benefit rate)]
50% rule
if employee contributes , contrinutions muct be less than 50% accrued benefits
IPP Past service Contributions
- can make past service contributions to IPP for past service that predates setup of IPP
- Funded over MAX period of 15 years
Tax treatment
IPP defers tax
- Eligible contributions tax deductible
- tax deferred growth
- no deemed disposition of asset on death of member
- eligible expenses tax deductible when paid b company sponsoring IPP
Advantages of IPP
-potential significant tax relief and tax deductions
-forced savings
fund assets protected by creditors
-guaranteed level retirement income
-indexing of pension benefits
-can be tailored to meet individual needs
-preservation of IPP assets on death
Disadvantages of IPP
- Expensive admin
- cannot access funds
- mandatory Contributions
- cannot make spousal contribution
IPP Tax Advantages
- may allow individual larger tax deductible contributions
- larger contribution = larger tax derral = higher pension fund = higher pension at retirement
IPP Forced savings advantage
- prescribed contributions MUST be made every eyar if plan registered provincially
- IPP will impact RRSP contributions room in year established and afterwards
IPP protection from creditors
- b/c registered pension plan–> creditor proof.
- mitigates risk of losing assets
- some exceptions to protection
IPP Guaranteed Level of Retirement Income
-B/C IPP is defined benefit plan- guarantees set level of retirement income upfront
IPP Indexing of pension benefits
-requires larger contributions, but still tax deductible
IPP reduced payroll tax
-money employer contributes to IPP of remployee not subject to payroll tax
IPP tailored to individual needs
- flexible retirement dates, distribution options of plan assets, level of pensions
IPP Administration -disadvantage
- more complicated and costly to set up
- fees for IPP tax deductible of paid directly by corporation
Terminal funding
right before retirement starts- may be able to make significant lump sum pmt
Retirement Compensation arrangements (RCA’s)
way for employers to provide adequate retirement benefits to employees
How they work
- employer/employee make tax deductible contribtions to custodian (trustee for RCS)
- Custodian holds the funds ina trust till paid to employee (beneficiary of trust)
- money divided equally into RCS investment account and RCA refundable tax account
RCA contributions
- no set limit on how much employer can contribute to RCA
- actuary wil determine contribution amt based on what is req to give employee reasonable pension based on % of average income
RCA funding
employer contributes using:
- funds accumulated in R/E
- O/S bonuses owed to key employees
- financiang from bank
- Life ins policy
RCA investments
no investment rules for RCA
RCA suitability
- for owners/managers, executives, key employees with significant income
- employees who are non residents when retire
- employers who want to attract/reward/retain key employees
RCA distribution of benefits
Benefits paid by custodian when:
- employee retires
- severance from employment
- substantial change in services employee provides- while still working for employer
- taxed when retirement income rec’d
Advantages of RCA’S
-Higher contribution Limits- significantly higher than RRSP, IPP, RPP + doesn’t affect RRSP contributions
- Tax benefits- contributions 100% tax deductible + not subject to payroll tax
- benefits not taxable till paid
Security of funds: held in trust- guarantees funds at retirement + protected fro creditors
- Attractive to prospective employees- way for employers to attract/retain talented employees
- flexibility of investments- not restricted
Disadvantages of RCA’s
-refundable tax acct of RVA held by CRA doesn’t pay interest
Profit Sharing Plans
- a defined contribution plan
- minimum 1% contribution even if no profit
- not a registered plan
Contribution levels
- amount of employer contribution directly related to profits
- minimum contribution $1 of salary even if no profit
- minimum employer contribution 1% of combined payroll of plan members
Allocation of Benefits
-based on points system
Total points = points for earnings + points for service
allocation= employee points / total points X (Profit or employer profit)
Tax treatment
- employers contributions tax deductible to employer
- employee contribution tax deductible
- benefits taxable when recd
Mas contribution levels
- combined contribution of employer + employee must not exceed money purchase limit if will be tax deductible
- contributions reduce amount to RRSP
Distribution Options
- Distribution Upon termination PRIOR to retirement
- Distribution at DEATH (before, after early retirement, after retirement
Distribution upon termination PRIOR to retirement
- if employee quits BEFORE end of vesting- may receive full refund of contributions + interest in cash (not incl employer cont)
- If employee quits AFTER vesting- contributions (incl employer) locked in- employee gets both portions
- funds must be used to provide retirement income (Deferred lifetime annuity)
Distribution at death
-Death before retirement:
preretirement DB = value of vested termination benefits accrued after 1986 till death
distribution before early retirement
-death more than 10yrs before EARLY retirement age:
surviving spouse can receive deferred ann.
or
spouse may trf commuted value to
1. own RPP plan
2.LIRA
3. Financial inst to buy annuity- tax consequences ?
death after early retirement age
Death WITHIN 10 yrs of early retirement age:
deemed to have been eligible for early retirement pension
-spouse gets 60% reduced early retirement pension earned + refund of employee cont. + interest
-no spouse: DB to beneficiary of estate (employees contrbutions + interest)
Death after retirement
- Straight life annuity
- Refund ann.
- ann. with guaranteed period
- joint/last survivor ann.
- variable ann
- Cash options
Straight Life annuities
- non contributory plan
- normal pension in form of straight life ann.
Refund annuities
-Contributory
-ensures employees get back value of contributions
-death before pension rec’d:
~least= employee cont. + interest
~balance in lump sum to beneficiary
Annuities with guaranteed period
- pension payable for life
- pmts guaranteed to continue min number of years- even if death occurs before end of guarantee period
Joint/last survivor annuity
- monthly benefit usually reduced compared to straight life annuities
- provides assurance that both will get retirement income for life
Variable annuities and cost of living supplements
-??
Cash Options
pension cannot be commuted to cash at retirement- b/c must be used to provide retirement income
3 Types of RPP
- Normal plans
- Notched Plans
- Bridged Plans
- Normal Pension benefits
-if retire before age 65, will see a jump in income when reach age 65 due to QPP and OAS
- Notched Pension benefits
- retire before age 65- get higher than normal pension pmts in bgn
- pmts reduced once turn 65 and government benefits kick in
- provides level income
- Bridged Plans
- bridging supplement equivalent to anticipated government benefits provided by plan prior to age 65 + normal level benefits
- additional benefit= additional cost to employer
Retirement due to disability
- full credit given to pensioners up to date of retirement without reductions
- cost assumed by pension plan
- if already receiving disability pmts frolong term disability- can defer credits til NRA
RULES AND REGULATIONS
??
Documentation
- Plan text
- trust agreement for trusteed plans
- Insurance contract for insured plan
- non technical explanatory materials
eligibility
- employer not req to set up pension Plan
-if employer does-
~ all FT emp. can join plan after 2 yrs continuous service
~part time employee- join after 2 yrs service at least 75% YMPE OR 700hrs service each yr for 2 yrs
no min/max age for joining plan
Vesting
point in time when RPP contributions made by employer become property of employee
-employee can receive benefit of contributions even if no longer works there
Locking In
after period of time as member of pla, employee and employer contributions locked in
-meaning contributions cannot be taken as lump sum, must be used to provide retirement income
Exceptions to Locking in rule
??? later
Portability
ability to trf pension credits to another pension plan or to Locked in RRSP when employee changes job
Minimum employer contributions
employer must contribute min 50% of cost of pension benefits accrued by employee after qualification date
-exemption: DBP that province indexing of benefits at rate equivalent to 75%
Survivors benefits
beneficiaries receive minimum refund of contributions made by member if they die
POST retirement deaths
all jurisdictions in Canada req retirement pensions paid as joint and last survivor annuity if had spouse
-benefit to surviving spouse reduced by 60% of initial pension
PRE retirement Death
- benefits vary
- depends on whether member was within early retirement age as well as marital status
