An employee pension plan is one more way to help your workforce feel secure and makes good business sense. For smaller employers a well-structured Group RRSP may be a more suitable and flexible solution.

At RPP Benefits Inc. we help our clients sift through the options and understand the regulations to create a solid retirement planning solution for your employees.


Group RRSP or Pension: which plan is better for your business?

Group RRSP

As a business owner you should entertain the implementation of a Group RRSP or Pension plan only when your business enjoys strong and stable cash flow, as this is a serious long-term commitment to employees. How do you choose which plan would be better-suited to your business?


Advantage of Group RRSP

A Group RRSP is simpler and less regulated than a pension plan, which makes it easier than a Pension Plan to suspend or wind down should unforeseen cash flow problems occur in future. It is by far the first choice for many small business owners. It is not subject to Pension legislation. Rather, a Group RRSP is created by implementing an RRSP for each participant and 'grouping' them under one contact with the RRSP issuer (a bank or Insurance company). Once set up it is very simple to administer and there is minimal ongoing paperwork..


Disadvantage of Group RRSP

A Group RRSP is less assured than a Pension Plan to create a retirement pension of your employees because there are no legislated locking-in rules. Once the employer contributions are committed to the plan on the employee's behalf, those funds immediately belong to the employee who then controls the funds, to the extent that he can remove all the RRSP monies (whether employee or employer contributions), pay any resulting tax, and use the funds for daily living, thus forfeiting an opportunity to plan for retirement.

To offset this disadvantage you can design your plan to minimize the temptation for employees to remove funds from their plan.

Group Pension Plan

If you, the business owner, wish to ensure the plan proceeds are entirely used to fund a pension plan, then you must set up a Group Pension Plan.

Two options are available: a Defined Benefit pension plan or a Defined Contribution pension plan.


Defined Benefit Plan

The pension which will ultimately be payable is defined by a formula written into the plan design. A typical entitlement formula will be based on earnings over the employee's length of service in your business, often with emphasis on the last few years of earnings, combined with a defined percentage entitlement based on those years of service. An example might be: credit of 1.5% per year of service, based on the best 5 years of your last 10 years of employment.

Employers and employees make regular contributions, usually a percentage of the employee's earnings. The pension at retirement does not depend on the fund actually accumulated; rather, the employer must 'top-up' the accumulated funds to an amount which will be sufficient to generate the pension promised by the formula.

Generally this plan is not a viable alternative for a small business operation since reserves must be set aside to fund the significant top-ups required to fund the promised pension. In addition, actuarial assessments are required every 3 years to ensure the plan has adequate reserves, which adds significantly to the cost of plan administration.


Defined Contribution Plan

With a Defined Contribution plan, the pension ultimately available to the employee is defined by the total contributions and investment earnings made over the lifetime of the contributor. Other than defining the percentage of contributions which will be made by the employer and employee, the contract does not include a formula for a final pension. Like an RRSP, the more money an individual has accumulated based on contributions and investment return, the greater the funds available to purchase an income at retirement.

This type of plan is ideal for small business operations because the cost of providing the benefit is controlled by the plan design and known in advance. When an employee retires no top-up payment is required because there is no promise to pay a pre-determined pension benefit.

To set up a plan the Plan Sponsor decides how much (as a percentage of salary) will be contributed on behalf of each employee, whether employees must participate (and at what percentage of earnings) and whether employee participation should be voluntary or compulsory.

There is some annual reporting required for both types of Pension Plans, but the Defined Contribution plan requires little or no actuarial intervention. The legislation for plans is provincial, unless your business is subject to Pension Benefits & Standards Act (PBSA) legislation, which overrides the provincial legislation.

Which Plan is Best for Me?

The information provided here is very general in nature. Pension legislation differs by province and for some employers Provincial legislation will be overridden by Federal legislation. You will need expert assistance by a professional familiar with Pension legislation and plan design.

If you wish to learn more about legislative requirements or how to go about setting up a pension plan, RPP Benefits Inc. will work with you and provide the assistance you need.


Need more information?

Click here for the CAP (Capital Accumulation Plan) Guidelines

Click here for the PBSA (Pension & Benefits Standards Act) Guide

Is the premium cost for providing benefits a tax deduction for the Business?

Yes it is. If a Corporation (the “employer”) sets up an employee benefits plan and pays the premium on behalf of the employees the premium paid by the business is deductible as a business expense.


If a Corporation provides Group Insurance for employees, is it a taxable benefit to employees?

Only the Life Insurance and Dependent Life premiums paid by the Corporation are considered a taxable benefit to the employee and any premium paid for these benefits by the Corporation in a tax year must be added to the employee’s income on the T4. This applies only to the life insurance premium paid by the Corporation. Premiums paid by the Employer for the other Group benefits are tax-free to the employee - and a definite tax advantage.


If an employee is reimbursed for Dental expenses claimed, is the reimbursement a taxable benefit?

No, the reimbursements received by employees for their Health and Dental expenses are not taxable benefits. If there were no Group plan, employees would be paying these expenses with their after-tax dollars, so this feature is a definite advantage to having a group plan.


Are Long Term or Short Term Disability payments received by an employee taxable income?

The answer depends on who is paying the premiums. If the premiums for Short Term and/or Long Term Disability benefits have been paid entirely by the employee, then Revenue Canada states that disability income payments received by the employee will be non-taxable income and need not be declared as income.

If the Employer pays even one cent of the disability premium, then any disability income payment received by the employee is considered a taxable benefit and the Insurance Company will issue a T4A.

If the Employer pays the disability premium, but includes all premiums paid as a taxable benefit on the employee’s T4 statement, then by convention CRA has considered that disability benefits received by the employee will be non-taxable income. While this premium treatment is not backed up by legislation, to date Revenue Canada has not challenged it.


Is M.S.P. premium paid by the Employer considered a taxable benefit?

Yes. While employee benefits are not, other than Life Insurance, a taxable benefit to the employees, any Provincial Medical Services Plan (MSP) premiums paid by the employer are a taxable benefit to the employees.

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