Module 2 - Designing Non-Pension Registered Retirement Plans Flashcards
Brief overview of the key characteristics of a RRSP
Is a contract between an individual an the issuer of the RRSP. Issuers may be an authorized insurer, trustee or corporation.
Contributions made by a taxpayer are deductible for taxation purposes within the contribution limits under the ITA.
Investment earnings on the assets of RRSPs are tax-sheltered.
Withdrawals from RRSPs are taxable unless they are excluded withdrawals pursuant to the home buyers plan, or lifelong learning plan.
An RRSP may be matured or annualized at any time, except that annuity must be purchased or the funds transferred to RRIF before age 71,
Another option would be an advanced life deferred annuity which allows for deferred receiving income or a portion at age 85.
Key characteristics of a group RRSP.
Is a collection of individual RRSPs for which the routine administration functions are centralized. A group RRSP is not subject to pension standard legislation.
The RRSP contribution is a before tax deduction, reducing the plan member’s income subject to income tax each pay period.
Each plan member has an individual account and can see how much as been contributed each year and how much it is worth.
A spousal account in a Group RRSP
The purpose is to help two members of a couple equalize retirement income, recognizing that otherwise the two individual’s retirement income could vary significantly. When a spousal account is established, the employee makes the contribution in the spouse’s name, the contribution is tax deductible to the plan member, up to their contribution limit, and the funds are owned by the spouse.
Most plan sponsors allow spousal accounts but may sometimes limit employer contributions to be considered made to the plan member’s account (no employer contributions to be allocated to spousal accounts)
Payments from a spousal RRSP are taxable to the spouse unless the funds are withdrawn within three years of contribution. In this case, the plan member will responsible for income tax assessment on the amount of the withdrawal.
Treatment of monies transferred to a group RRSP from a member’s prior pension plan.
Employees are often allowed to transfer monies to their plan from prior employer sponsored plans or personal RRSPs. Sometimes locked-in under pension standard legislation. If that is the case locked-in funds will be held separately from unrestricted RRSP funds in locked-in RRSP or called LIRA Locked-In Retirement Account.
Key characteristics of a deferred profit-sharing plan (DPSP)
Registered under the ITA. Tax treatment similar to DC RPP.
Only organizations that are able to make profits can sponsor a DPSP, they are not subject to pension standards legislation.
A DPSP operates at arms length from the plan sponsor, through the establishment of a trust. The trust may operate by a trust company, or by at least three individual trustees, one of whom must be independent of the operations of the plan sponsor and cannot be a shareholder of the plan sponsor.
The trustee contracts with a DPSP provider, who registers the DPSP document and trust with CRA. Only plan sponsors may contribute to a DPSP; members are not allowed to contribute.
Each DPSP member has an individual account and can see how much the plan sponsor has contributed each year and how much it is worth. As with a defined contribution pension plan, the amount of retirement income available to a member of a DPSP spends on how much was contributed and how well the investments are managed, and it is not known until the plan member stops work.
How an individual’s tax deductible RRSP contribution limit is determined in any year.
A plan member can contribute 18% of their earned income subject to a dollar maximum. Limits are set and governed by a retirement savings system based on the principal that tax assistance should be the same for all individuals with the same income, regardless of the arrangement in which they participate.
Earned Income
Is defined by the ITA. They are employment income, business income, royalties, rental income, alimony or maintenance payments, payments received under a supplementary unemployment benefit plan and research grants.
How ITA applies to plan sponsor contributions to a Group RRPS and the resulting additional costs a plan sponsor may experience.
Under ITA, only individuals can contribute to RRSP accounts. Plan sponsor contributions are deemed to be paid to the employee, who in turn contributes the amount to the Group RRSP. This additional amount paid to the employee can often result in additional costs in for of the contributions to government plans including CPP QPP, EI, Worker comp, and provincial health plans.
This will not increase taxes.
The maximum amount a plan sponsor can contribute to a DPSP in respect to a plan member.
Tax-deductible plan sponsor contributions to a DPSP cannot exceed a maximum contribution per plan member that is limited to the lesser of 18% of the member’s compensation for the year and one half of the DC registered pension plan limit for the year.
Tax implications of withdrawing funds of a Group RRSP or DPSP before retiring.
This will increase their taxable income by the amount of the withdrawal.
This has two tax implications:
1- withholding taxes are incurred, ranging from 10-30% and is submitted to CRA. The Group RRSP it is submitted by the service provider and the DPSP submitted by the trustee
2- Taxable income increases and person can move up to a higher tax bracket.
Criteria a plan sponsor uses to establish eligibility for participation in a Group RRSP or DPSP.
a) employment level (admin, supervisor..)
b) Employee tenure or seniority with the company
c) Whether the employee is participating in or registered to participate in an RPP.
d) Whether the employee has met a specified waiting period.
e) Whether employees spouses may join the plan.
Shareholders and their family members may join the Group RRSP but may not join the DPSP because of ITA rules. Any individual who does not deal at arms length with the plan sponsor or who holds, alone with with someone, 10% or more of the issued shares of any class of shares of the plan sponsor or related plan sponsor.
Methods used to determine a plan sponsor contribution to a Group RRSP and a DPSP.
Often plan sponsors contributions are determined based on a matching formula - an amount that matches either all or a portion of the contributions that the plan member makes to the Group RRSP or in case of the DPSP, to the Group RRSP.
Plan sponsors contributions can also be relate to the members job classifications or period of service with the plan sponsor.
Some DPSPs relate contributions to the level of company profits, or the employer may supplement. a matching contribution schedule by an amount related to successful company operations.
Compare the vesting provisions of Group RRSP to DPSP and identify the considerations that may impact the selection of the DPSP vesting provisions.
VESTING - refers to ownership by a terminating plan member of the plan sponsors contribution and the investment income on those contributions.
Group RRSPs are merely a collection of individual RRSPs and the vesting is immediate, and contributions made by the plan sponsor are immediately owned by the plan sponsor.
Vesting of the plan sponsors contribution to a DPSP can be determined by the plan sponsor subject to ITA rules that require full vesting after a period no longer than two years (the vesting period can be up to 24 months from the date of first participation of the plan) Plan sponsors are able to make exceptions to their vesting rules, subject to matters that fall under the requirements of Human Rights Legislation.
If a DPSP member terminates employment prion to being vested, the plan sponsor can reclaim its contributions j and related investment income. These amounts are called — Forfeitures.
How plan sponsors deal with in-service withdrawals from Group RRSP or DPSP
To discourage in-service withdrawal from Group RRPS the plan sponsor may suspend contributions. a typical suspension is for a period of 6 months to a year.
in Group RRSP these rules differ depending on type of contributions like home buyers plan or LLP or often excluded from suspension.
in DPSP the plan sponsor can determine whether in-service withdrawals of vested amounts will be allowed and whether any additional rues (suspension) may apply. DPSP does not have LLP or HBP.
Retirement income options available for members of DPSPs
Similar to those of RRSP members. The member may choose a Life or Fixed-Term Annuity, or to transfer their account to RRSP or RRIF. Another option before the end of the year the member turns 71 is the advanced life deferred annuity option which can differ an annuitant until the age of 85 before receiving their DPSP.
A DPSP may also allow the member to receive installlment payments over periods for up to 10 years from the date when the amount becomes payable (at retirement) or receive a lump sum payment from the DPSP balance. unless the DPSP is very low, a lump sum is not tax-effective approach.
