| Employees
| As a small business owner, the subject of pension plans may have been on your mind. Implementing an employee pension plan can be a major decision. What are the options and how can it start? |  |
David F. Andrews B Comm CFP CLU TEP
Employees
Group RRSP
The simplest format of registered savings available to employees is a Group RRSP. Generally the employer does not contribute and enrollment is voluntary. The advantage to the employee is that his contributions will be eligible for immediate tax adjustments and he does not have to wait until April for a refund. In the absence of employer participation it is seldom successful. They do make an excellent add on to a more formal pension plan.
Deferred Profit Sharing Plans
This is a plan that is funded by the employer who would like to provide a payment on behalf of the employees each year, but is concerned about the commitment. It does not require an annual commitment. A GRRSP makes a nice complement to this plan. The advantage of the DPSP over making contributions to the employees GRRSP is that the employee cannot access the funds while still employed.
Money Purchase Pension Plan
This type of plan usually provides for some form of matching formula between the employee and employer. For example 4% of payroll is a typical plan where the employer then matches the employee contribution. The advantage of this type of plan is that the formulas may be different for different employee classes, they may be improved over time and the employer knows the cost as it is all included in his payroll costs. When the employee is ready to draw, the amount will be based on the accumulated assets in his plan.
Defined Benefit Plans
Large firms and governments have offered this type of plan for many years. The pension amount is defined and the employer is responsible to insure that enough money is in the plan to meet the commitments.
Individual Pension Plans (IPP)
High income Business owners may wish to take advantage of the Defined Benefit rules for connected persons.
Assuming the employer earns maximum T4 income, the contribution levels for the IPP exceed RRSP limits starting at about age 45. IPPs also permit the purchase of past service and may offer some interesting tax planning opportunities.
