Saving for the Future
36 Employment Work Arrangements
Anne Lee
Many larger employers in the trade industry have workplace retirement savings arrangements set-up for their employees’ benefit. These arrangements may vary in administration, but are usually based on both employee and employer contributions. Popular types of employment work arrangements include defined benefit (DB) pension plans, defined contribution (DC) pension plans, and group registered retirement savings plans (Group RRSP).
Defined Benefit (DB) Pension Plans
Employer-sponsored defined benefit pension plans provide eligible employees a guaranteed amount of income for life upon retirement. Employees provide a set definitive retirement benefit based upon factors such as employee’s last 5 years of salary and total years of service. Employers bear the risk that the returns and contributions in the plan will cover all the defined-benefit amounts that will be due to each retired employee.
As there is increased risk to the employer and required complex actuarial projections and calculations, it is much rarer to find a defined-benefit retirement plan in 2024. There has been a huge shift towards issuing defined contribution pension plans, over defined benefit pension plans.
Defined Contribution (DC) Pension Plans
Defined Contribution Pension Plans are primarily funded by the employee, even though administered by the employer. The employer has no obligation to the account’s performance after any funds are deposited. It is popular for the employer to have a matching contribution to the account, along with any amount provided by the employee directly paid through salary pay cheque. Thus, it is very little work and low risk to the employer to administer. The administrator would usually designate a brokerage firm to manage the investments in the Defined Contribution Pension Plan.
Group Registered Retirement Savings Plans (Group RRSP)
A Group RRSP is a registered retirement plan that is established and administered by an employer for a group of its employees. It consists of many individual RRSP accounts, one for each employee. It is very popular to take advantage of an employer matching program with Group RRSP plans.
The total amount contributed to your Group RRSP or DPSP reduces the amount, dollar-for-dollar, you can contribute in the current year to your own individual RRSP.
Tax Tip: Withholding Taxes on Employer Contributions
The contributions made by the employer to a Group RRSP are taxable to the employee in the year of the contribution. The amount will be added to the employee’s employment income and reported on T4 – Statement of Remuneration Paid tax slip. It is assumed that an individual will be claiming a deduction for all RRSP contributions made in the year. Therefore, it is not mandatory for the employer to withhold income tax on Group RRSP contributions. It is recommended to ensure that one has sufficient funds to cover any end of year tax liability if your tax situation changes upon filing of the T1 tax return.
Some employer matching programs are referred to as a Deferred Profit Sharing Plan (DPSP). This type of employer retirement plan is different to Group RRSP and is more similar to the defined contribution retirement plan. Employer contributions to a DPSP are not taxable for the employee, and the employee will only pay taxes on the money when amounts are withdrawn from the DPSP plan.
