As an employer, offering a retirement savings plan shows that you care about the long term well being of your employees which creates happy, long term, loyal employees. Benefit plans offerings can be complicated and it’s best to understand the pros and cons of different strategies.
Pensions Plans
Separated into defined benefit (DB) plans and defined contribution (DC) plans. A pension plan is a retirement plan that requires the employer to make contributions to a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement. Some pension plans have a voluntary investment component allowing the worker to contribute part of their current wages. Here the employer contributions are vested and usually ‘locked in’ until they retire.
Group RRSP’s
A Group RRSP is like an individual RRSP but administered on a group basis by the employer. There can be matching up to a certain percentage or dollar amount by the employer. These types of retirement savings plan are typically less costly and easier to administer compared to a pension plan and withdrawal rules are less restrictive.
Deferred Profit-Sharing Plans (DPSP)
DPSP’s are a combination of a pension and retirement plan sponsored by employers to help workers save for retirement. A DPSP is created when a company distributes part of their profit into their employees DPSP account. Only employers can contribute to this type of plan.
GRRSP/DPSP Combination plan
The GRRSP is set-up to take employee contributions and the DPSP is set-up to take the employer contributions. Compared to a sole Group RRSP it provides additional features like withdrawal restrictions, vesting, and elimination of payroll taxes which make it a great choice for employers.
Individual Pension Plans (IPP)
If you are a business owner or an executive, an IPP can create additional contribution room over and above an RRSP. It can let you build your retirement income under a tax-sheltered umbrella and get the maximum pension that Canadian tax law allows.
Retirement Compensation Arrangement (RCA)
An RCA is a non-registered plan set-up by an employer to close the ‘pension gap’ of high-income earners. It is said that you need about 70% of your current income in retirement. However due to the Canada Revenue Agency (CRA) ceiling on RRSP contributions, high income earners are often left with far less than 70%. Owners and executives of successful, private corporations as well as executives of public corporations with substantial incomes may qualify. Generally, the company should achieve annual profit levels more than the small business deduction limit to qualify for the plan.
