Retirement Plans

Understand the Difference Between a Group RRSP, VRSP and Executive Retirement Plans

Employers that provide retirement plans to their employees provide valuable benefits. These plans are able to help employees save for retirement, which improves their financial stability, as well as their morale.  Retirement plans also benefit employers by attracting and retaining key employees and executives.

It can be challenging to understand the many options available and determine the best retirement planning options for you and your employees.  Read more to learn about the Group RRSP, VRSP and Executive Retirement plans.

Group RRSP

A Group RRSP is a collection of individual RRSPs that are administered together, which allows employees to set money aside for retirement tax free, usually with lower business fees.

Limits

  • There is no minimum age to start a plan – anyone who files a tax return with earned income may participate
  • Employees may contribute up to age 71
  • Annual contributions are limited to 18% of the salary of the previous year, up to an established dollar amount ($26,230 in 2018). If an employee has a personal RRSP and a Group RRSP, the limit is applied to the combined total
  • Any unused portion of this limit carries forward to future years
  • Contributions must be made before the March 1stdeadline to claim a tax deduction

Benefits to Employers

  • Simpler to administer than traditional pension plans
  • Plan sponsors have the option to contribute, but it’s not mandatory
  • Helps to attract and retain employees

Benefits to Employees

  • Contributions are tax deductible and investment earnings are tax-sheltered until withdrawal
  • Employees may set up recurring contributions which will be deducted from payroll before tax
  • Employees can also contribute more from bonuses or tax refunds to catch up to their personal RRSP limit (outlined on their most recent Notice of Assessment from the CRA)
  • Possibility to borrow from an RRSP to buy a home (Home Buyer’s Plan) or to finance higher education (Lifelong Learning Plan)

Potential Disadvantages

  • Employer contributions are subject to payroll tax, and they are seen less frequently in this type of plan compared to a VRSP. However, they can be contributed to a DPSB, which has the same rules as a VRSP, and not subject to payroll tax
  • Must contribute before the RRSP deadline to claim on personal taxes
  • Withdrawals from the plan are taxed, but investment income earned is not during the growth
  • Funds are generally not locked in, except in a DPSB, where they can be locked in for a period of up to 2 years

At retirement, you must convert to a Registered Retirement Income Fund (RRIF), cash, or an annuity.

VRSP

A Voluntary Retirement Savings Plan (VRSP) is a simplified Defined Contribution pension plan for small/medium sized businesses, governed under the Voluntary Retirement Savings Plans Act. VRSPs apply to employees whose employers do not already offer Group Retirement Savings Plans.

Employers with at least 5 eligible employees on December 31st of the prior year, and 10 eligible employees by June 30th of the current year must offer a VRSP by December 31stof the current year.

Limits

  • Employees over 18 and with at least one year of service are eligible
  • Can opt out of the plan within 60 days after receiving notification of enrollment
  • Plan is required by law to be set up by a certain date if there is no other retirement plan in place

Benefits to Employers

  • Simpler to administer than traditional pension plans
  • Allows employers to decide whether they want to contribute
  • Employer contributions are not mandatory, but they are a deductible salary expense, and not subject to payroll tax

Benefits to Employees

  • Employees are automatically enrolled in the plan
  • Employee contributions are deducted before tax
  • Employer contributions to the plan aren’t counted as taxable employee income
  • Employees pay tax upon withdrawal
  • Transferable, so employees won’t lose their funds if they switch jobs
  • Possibility to change contribution rate or stop contributing for a period of time if you cannot afford to save
  • Employer contributions are locked in until retirement, but employee contributions can be withdrawn at any time.

Executive Retirement Plans

Supplemental Executive Retirement Plans (SERP) offer personalized investment plans that go beyond what can be contributed to an RRSP, especially for company executives.  If employers contribute funds to guarantee payment of SERP benefits, it’s called a Retirement Compensation Agreement (RCA), which is subject to special rules under tax laws.  A SERP is not considered an RCA if benefits are paid on a pay-as-you-go basis by the employer.

Employer Benefits

  • Supplemental Executive Retirement Plans (SERP) are a valuable tool to attract and retain key executives.
  • Bridges the gap to cover underfunded executive pensions

Employee Benefits

  • Not registered
  • Allows executives to save more for retirement than contribution limits for an RRSP

Potential Disadvantages

  • If an employer contributes funds to guarantee payment of SERP benefits, it’s called a retirement compensation agreement (RCA). RCA plans are subject to special rules under tax laws
  • The CRA has recently taken notice of any “unreasonable” SERP benefits, determining that they be treated as salary deferrals for tax reasons. Employees would be taxed annually rather than upon disbursement, and employers could face penalties for failing to withhold and remit taxes

Score Financial Offers Retirement Planning Services

Score Financial offers professional retirement planning services to help you wade through all of the limitations, benefits and potential disadvantages of each type of retirement plan. Contact us today to speak with an experienced financial planning specialist for a personalized and confidential consultation.

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