When employers are putting a group retirement program in place most people default to either the Group RRSP or a Defined Contribution Pension Plan. Although both types of plans have merit, there is another option that does not get enough attention – The Group RRSP – DPSP combo plan (DPSP stand for Deferred Profit Sharing Plan).
How does the Group RRSP – DPSP combo plan work?
For all intensive purposes, there is really 2 plans that work together.
The group RRSP plan is designed to take employee contributions while the DPSP is designed to take the employer contributions. What are the advantages of having the employer contributions go into the Deferred Profit Sharing Plan?
- Employers contributions are not taxable to the employee and therefore does not attract payroll tax. This primarily applies to employees earning less than the YMPE which is currently $55,300. If the employer contributes their portion to a Group RRSP, the contribution is deemed a taxable benefit and then payroll taxes like EI, CPP and health taxes have to be paid. Contributions to a DPSP are still a deductible expense to the employer.
- Let’s compare a $5000 employer contribution into a Group RRSP vs a DPSP
- A $5000 contribution to a group RRSP will have these added costs
- Employer CPP – $246.50
- Employer EI – $121.00
- Vacation Pay – $200.00 (if applicable)
- WCB – $215.00 (if applicable)
- A $5000 contribution to the DPSP avoids all these forms of payroll tax (up to 15.6%).
- Deferred Profit Sharing Plans allow for vesting up to a maximum of 2 years. In other words, if the employee leaves before the 2 years, the employee does not get the DPSP contribution
- The DPSP also allows for a more formal and distinct withdrawal provision on the employer contributions. Quite often, these plans will restrict withdrawals of the employer contributions but give the employee access to their contributions to the Group RRSP.
- Employer retains control while escaping the restrictive provincial pension legislation.
- With the DPSP, there is no restriction on the timing of the employer contributions except at year end. Employer can make the contribution whenever they want although many submit with the matching employee contributions. Bonuses or profit sharing can be paid into the contribution whenever.
- DPSP contributions are added to the T4 as a Pension Adjustment (PA). The pension adjustment decreases the employees RRSP contribution room.
Some of the other differences
- The most an employer can put into a DPSP is $13,115 per employee which is exactly 50% of the maximum RRSP limit of $26,010
- Employees can only contribute to the Group RRSP. They cannot make contributions to a DPSP.
- Employer cannot make spousal contributions to a DPSP
- DPSPs are only applicable for ‘for profit’ corporations. Non profits cannot participate in DPSPs.
- No connected persons can joining the DPSP. A connected person is someone with 10% ownership and their family members. These shareholders can participate in the Group RRSP plan.
- There can be some addition annual filing costs to holding a DPSP but the costs are very minimal.
Related article: New financial planning data
My two cents
In most cases, where a business is matching employee contributions, I think the Group RRSP – DPSP combo plan really gives the right balance of important issues to making a great plan. The combo plan can do almost everything a Group RRSP plan can do with some added features like withdrawal restrictions, vesting, and the elimination of payroll taxes, which makes great business sense for the employer.
Employees still have all the flexibility of using the money in retirement (unlike pension fund restriction).