Involuntary terminations can be costly for employers in Ontario
If you’re an employer with a provincially-registered defined benefit pension plan with employees in Ontario, it’s important to know the rules surrounding involuntary terminations. Even if you outsource your pension administration to a third-party provider, it’s your duty to determine whether a termination is voluntary or involuntary. As you’ll soon find out, the financial implications of a voluntary and involuntary termination can be significant. An employee who is involuntarily terminated with at least 55 points is entitled to grow-in benefits.
What is an involuntary termination?
Before paying out grow-in benefits to employees, it’s important to determine whether terminations are voluntary or involuntary. According to Ontario pension legislation, the following “activating events” entitle an employee to grow-in benefits:
- Winding up your pension plan;
- Terminating an employee without cause; and
- The employee resigns before his or her date of termination (provided in a written notice).
However, not all situations entitle employees to grow-in benefits. Employees are specifically excluded from grow-in benefits in the following situations:
- Terminating an employee due to willful misconduct, disobedience, or willful neglect of duty that isn’t trivial, and hasn’t been condoned;
- The employee is temporarily laid off (as defined in subsection 56(2) of the Employment Standards Act, 2000); and
- Termination of an employee working in the construction industry (as defined in Regulation 285/01 made under the Employment Standards Act, 2000).
As an employer, it’s your responsibility to determine if a termination is voluntary or involuntary. Even if you outsource your pension administration to a third-party provider, you must specify the type of termination on the pension benefit request. Failing to properly classify an employee as an involuntary termination can result in litigation by the former employee.
What are grow-in benefits?
Once you’ve determined the termination of an employee is involuntary, it’s time to calculate grow-in benefits. Grow-in benefits are offered to members of defined benefits pension plans who are involuntarily terminated or when the plan is wound up. However, just because an employee is involuntarily terminated, doesn’t mean he or she is entitled to grow-in benefits.
Before we discuss grow-in benefits, it’s important to understand what a grow-in means. A grow-in means that any reduction to an employee’s pension caused by an activating event, is calculated as though the employee remained in the pension plan until he or she retired.
To receive grow-in benefits, the employee must meet the following conditions:
- The employee is employed in Ontario at his or her date of termination or when the plan is wound up.
- The Rule of 55: The employee has at least 55 points at his or her date of termination or the date the plan is wound up. To determine an employee’s points, take the sum of his or her age and years of continuous service at the date of termination. For example, an employee who is 50 years old with 12 years of continuous service would be entitled to grow in benefits (50 + 12 = 62 points).
- Bridging Benefits: To be eligible, an employee must have 10 years of continuous service or more.
Why grow-in benefits are costly for employers
If you’re an employer with a provincially registered defined benefit pension plan with employees working in Ontario, the introduction of grow-in benefits on July 1, 2012, made it more costly when terminating employees involuntarily. When calculating the commuted value, grow-in benefits must be included. For example, if an employee is involuntary terminated and entitled to a bridge, the bridge must be offered as part of the deferred pension option and included in the calculation of the commuted value.
When the decision has been made to terminate an employee, it’s important to consider the grow-in benefits as part of the severance package. Depending on how generous the pension plan is and how long the employee has been a member of the pension plan, the grow-in benefits can be quite substantial.