Types of group retirement and savings plans
Registered pension plan (RPP)
An RPP is set up by an employer to provide retirement income to employees. The plan is registered with the Canada Revenue Agency (CRA) to provide tax advantages. Contributions made to an RPP are tax-deductible within certain limits. Investment income isn’t taxed until it’s paid out of the plan.
The employer is required to contribute to an RPP and the employees may or may not be required to contribute. There are two types of RPPs: defined contribution and defined benefit.
The employee and/or the employer make contributions on the employee's behalf—usually a percentage of the employee's current income. The limit is 18 per cent of the employee’s current annual income subject to a dollar maximum. This limit applies to contributions made by both the employee and/or employer. Retirement income from the plan is based on the total value of the accumulated contributions and the investment income earned by the time the employee retires. The value of the plan will vary, depending on market performance and the selected investments.
A defined benefit plan guarantees the employee a specific income at retirement. This income is determined by a formula, which is usually based on years of service and earnings. One sample formula might be: (2% x years of service) x average income for best five years = pension benefit. For example, an employee works 30 years, and her best five years of income averaged $50,000, so her annual pension income will be $30,000. (2% x 30 years) x $50,000 = $30,000. There are variations of formulas depending on the plan. Some formulas include adjustments for income up to the YMPE (year’s maximum pensionable earnings) to factor in expected CPP/QPP benefits in retirement.
Employees may be required to contribute a percentage of their earnings to a defined benefit plan. The employer must contribute any additional amounts required to provide the promised benefits. Most provinces have legislation in place that prohibits employees from paying for more than half of their own benefits.
Registered retirement savings plan (RRSP)
A savings plan that’s registered with the federal government to qualify for the following tax advantages:
Earnings on the investments in an RRSP aren’t taxed when earned. Instead, they’re "tax-deferred," meaning investors don’t have to pay tax until earnings are withdrawn from the plan. Investors earn income on money they’d otherwise have paid out in tax. Over time, this can add up to significant savings.
RRSP contributions are tax-deductible (within the specified limits). Contribution amounts are deducted from an investor’s taxable income for the year, reducing income tax owed.
A group RRSP differs from an individual RRSP in two ways:
- Contributions to group RRSPs can be made through payroll deduction.
- Group RRSPs usually have lower investment management fees.
Limits are defined by the Income Tax Act. The limit is 18 per cent of the previous year's earned income minus the pension adjustment for the previous year. The 18 per cent limit is subject to a dollar maximum.
If contributions to an RRSP are less than the limit, the difference is called your contribution room. For example, an investor with an annual RRSP contribution limit of $7,000 contributes only $2,000. The deduction room is $5,000 and can be carried forward for an unlimited time. For more information about RRSP contribution limits, visit www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html.
Deferred profit sharing plan (DPSP)
These plans are set up by employers as a way to share profits with their employees. Contributions depend on the profits of the company. Employee contributions aren’t allowed. The plan is registered with the Canada Revenue Agency (CRA) and contributions are tax-deductible to the employer within certain limits, as defined by the Income Tax Act.
The contribution limit is half of the defined contribution limit subject to a dollar maximum. Investment income isn’t taxed until it’s paid out of the plan. A DPSP often substitutes for, or supplements, a group RRSP.
Tax-free savings account (TFSA)
After-tax dollars you contribute to a TSFA grow tax-free. Withdrawals from a TFSA are also tax-free so the account can be used for retirement savings, retirement income, or for such things as a vacation or a new car. To qualify for a TFSA, an investor must be 18 or older, a resident of Canada and have a valid social insurance number.
Multiple TFSAs are allowed as long as the combined annual contributions for all accounts don’t exceed the maximum annual TFSA contribution amount. Unused contribution room is carried forward indefinitely.
Income earned within a TFSA and withdrawals from it don’t affect eligibility for federal income-tested benefits and credits, such as Old Age Security, Guaranteed Income Supplement or the Canada Child Tax Benefit. Contributions aren't tax deductible and the investment income earned in the account along with any reported losses or gains aren't considered taxable income.
The TFSA provides seniors with a tax-free savings vehicle to meet ongoing savings needs, even after age 71. Spouses, common-law partners and children age 18 or older of employees may set up an account in a group TFSA, if the plan sponsor permits it.
To find out TFSA contribution amounts, visit Canada Revenue Agency’s website at www.cra-arc.gc.ca/tfsa.
Non-registered savings plan (NRSP)
A savings plan that provides investment opportunities for amounts unrestricted by government regulations and contribution limits. Investment growth in an NRSP is subject to annual taxation. An NRSP provides flexibility at termination and retirement since no locking-in rules apply.
Employee profit-sharing plan [EPSP]
An arrangement under which amounts are paid by the employer into individual accounts held for the benefit of participating employees. These amounts must be calculated by reference to the employer’s profits or paid out of accumulated profits.
Employer contributions are deductible as an expense without limit. Employees must include all contributions to the EPSP on his or her behalf and any investment income earned thereon in his or her taxable income. In short, the tax treatment of EPSP contributions is the same as if the employer paid the employee an increased salary.
There are no vesting* requirements and vesting provisions vary from plan to plan, ranging from immediate vesting to deferred vesting that doesn’t occur until the plan member retires.
*Vesting is a process in which an employee owns the stock incentives or contributions made by the employer only after a determined period of time.
Employee stock purchase plan
Employers who offer this type of plan typically give eligible employees the opportunity to purchase shares of the company at a set price. The employer doesn’t pay for the shares. Employees purchase the shares using after-tax income.
Simplified pension plan (SPP)
This type of plan is available only in Quebec and Manitoba, and offers:
- Flexible employer contribution levels including ad-hoc contributions
- Flexible employer plan designs including withdrawal rules and portability
- No need for a pension committee, which is required for a traditional pension plan
- Simplified plan administration and reporting
Pooled registered pension plan (PRPP)
PRPPs will be available to employees working for small- to medium-sized businesses that don’t currently offer the possibility of contributing to a retirement savings plan through payroll deductions.
Exact details will be determined by future federal and provincial legislation.
Voluntary retirement savings plan (VRSP)
VRSPs are available to employees working for small- to medium-sized businesses in Quebec that don’t currently offer the possibility of contributing to a retirement savings plan through payroll deductions. All Quebec employers that don’t offer an RRSP or RPP, and have five or more eligible employees, are required to offer a VRSP. Employers with fewer than five eligible employees have the option of providing a VRSP, but aren’t required to do so.
Details are subject to change, and will be determined by provincial legislation in Quebec.
For more information and current updates, visit www.vrsp-greatwestlife.com.
An investment-only (IO) plan is not a traditional type of plan like an RRSP or an RPP. IO is an industry term that describes the administrative and investment services for defined benefit plans.
IO plans offer simpler plan funding solutions for defined benefit plans, and include access to a broad range of pooled investment options.