Deferred Profit Sharing Plans (DPSP) for Businesses in Ontario
A Deferred Profit Sharing Plan (DPSP) is a flexible employee benefit option similar to a Defined Contribution Pension Plan but with unique features. In a DPSP, an employer allocates a portion of pre-tax profits to eligible employees. Unlike a Defined Contribution Pension Plan, where the pension amount is predetermined by contributions and investment returns, the benefits under a DPSP depend on the company’s profitability, contribution levels, and investment performance.
Key Features of a DPSP
- Employer Contributions: Contributions made by the employer are capped at 9% of the employee’s earnings for the current calendar year, up to half of the Registered Pension Plan maximum limit. These contributions are tax-deductible for the employer and do not constitute a taxable benefit for employees.
- Employee Contributions: Unlike a Defined Contribution Pension Plan, employees cannot make personal contributions to a DPSP. Contributions are solely dependent on the company’s profitability.
DPSP Investment Options
The investment choices available under a DPSP are similar to those in a Defined Contribution Pension Plan and generally include:
- Guaranteed investment funds
- Canadian bond funds
- Canadian balanced funds
- Canadian equity funds
- International and/or global equity funds
- Segregated funds
DPSP Pension Options at Retirement
Upon retirement, plan members can choose between a life annuity or a Registered Retirement Income Fund (RRIF). Each option has distinct features:
- Life Annuity: Offers guaranteed payments for the life of the plan member, with options for a minimum guarantee period (e.g., 15 years) or joint and last survivor benefits. Payments may be continued at the same level or reduced after the member’s death. If the joint and last survivor option is not selected, the plan member and their spouse must sign a “Spouse’s Waiver of Rights Under a Pension Plan” form.
- RRIF: Provides greater flexibility with payment schedules and investment choices compared to a life annuity. While the income received each year is taxable, the balance remains tax-sheltered. The minimum income is set by Revenue Canada based on a percentage of RRIF assets, but there is no maximum income limit, and the plan can extend beyond age 80.
Advantages of a DPSP
- Ease of Communication and Administration: Simple to explain and manage.
- Tax Benefits: Employer contributions are tax-deductible and do not count as taxable income for employees.
- Exempt from EI and CPP/QPP Deductions: Contributions are not subject to Employment Insurance or Canada Pension Plan deductions.
- Tax-Deferred Returns: Investment returns grow tax-deferred.
- Reduced Funding Issues: Fewer concerns about future funding, over-funding, or plan surpluses.
- Alignment with Company Performance: Employees have a direct stake in company profitability.
- Cost Flexibility: Employer expenses decrease if the company is not performing well.
Disadvantages of a DPSP
- No Employee Contributions: Employees cannot contribute to the plan.
- Unpredictable Contributions: Employer contributions vary based on profitability, which can be a disadvantage for employees.
- Non-Guaranteed Benefits: Benefits are not guaranteed and may be less predictable than other pension plans.
- Potentially Lower Benefits for Older Employees: Benefits may be lower compared to a Defined Benefit Plan due to shorter investment time.
A Deferred Profit Sharing Plan can be an effective tool for rewarding and retaining employees while offering flexibility for your business. For tailored advice and solutions that fit your company’s needs, contact us today.