HR Answers -- Pensions, Benefits, and Payroll …HR Answers Now – Pensions, Benefits, and Payroll Processing CCH Canadian Limited 300-90 Sheppard Avenue East Toronto Ontario M2N

HR Answers Now –

Pensions, Benefits, and Payroll Processing

Neil Cohen, LL.B. Theo Anne Opie, LL.B.

3rd Edition

HR Answers Now –

Pensions, Benefits, and Payroll Processing

CCH Canadian Limited300-90 Sheppard Avenue East Toronto Ontario M2N 6X11 800 268 4522www.cch.ca

Neil Cohen, LL.B. Theo Anne Opie, LL.B.

3rd Edition

Published by CCH Canadian Limited

Important Disclaimer: This publication is sold with the understanding that(1) the authors and editors are not responsible for the results of any actions takenon the basis of information in this work , nor for any errors or omissions; and (2)the publisher is not engaged in rendering legal, accounting or other professionalservices. The publisher and the authors and editors expressly disclaim all and anyliabilit y to any person, whether a purchaser of this publication or not, in respectof anything and of the consequences of anything done or omitted to be done byany such person in reliance, whether whole or partial, upon the whole or any partof the contents of this publication. If legal advice or other expert assistance isrequired, the services of a competent professional person should be sought.

ISBN 978-1-55496-417-8

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T A B L E O F C O N T E N T S

PagePENSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Plan Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Plan Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Pension Standards Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Taxation of Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Human Resources/Management Concerns . . . . . . . . . . . . . . . . . . . . . . . . . 120

BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Government Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Disability Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Survivor Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Non-Traditional Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168

Benefits Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Medical and Dental Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Flexible Benefit Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211

HR ANSWERS NOW — PENSIONS, BENEFITS, AND PAYROLL PROCESSING, 3RD EDITION iii

TABLE OF CONTENTS

PagePost-Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

PAYROLL PROCESSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

Payroll Processing for New Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238

Employment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252

QPIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264

CPP and QPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

Employer Remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

Penalties for Employer Remittance Failures . . . . . . . . . . . . . . . . . . . . . . . 293

Employer Taxes and Levies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301

Year-End Tax Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

Garnishment and Family Support Orders . . . . . . . . . . . . . . . . . . . . . . . . . 326

Workers’ Compensation and CSST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346

iv HR ANSWERS NOW — PENSIONS, BENEFITS, AND PAYROLL PROCESSING, 3RD EDITION

PENSIONS

Plan Types

PageWhat are the main types of employer-sponsored pension plans? . . . . . . . . . . . . . 2

What is the difference between a registered and an unregistered plan? . . . . . . 3

What is a registered retirement savings plan (RRSP)? . . . . . . . . . . . . . . . . . . . . . . . . . 3

What is a group registered retirement savings plan (Group RRSP)? . . . . . . . . . . . 5

What is a capital accumulation plan (CAP)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

What is a supplemental retirement arrangement or supplementaryemployee/executive retirement plan (SERP)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

What is a multi-employer pension plan (MEPP)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

What are annuities and how are they used in a pension arrangement? . . . . . . 8

What is a deferred profit sharing plan (DPSP)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

What is a flexible pension plan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Should employers stay away from sponsoring defined benefit plans? . . . . . . . . . 10

Does a government pension plan integrate with an employer-sponsoredplan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

How does one convert a defined benefit plan to a defined contribution plan? 11

What is a stock purchase plan and a stock option plan? . . . . . . . . . . . . . . . . . . . . . 12

What types of plans can accept transfers from registered pension plans? . . . . . 13

What is a jointly sponsored pension plan? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

What is a tax-free savings account (TFSA)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Does everyone qualify for government-sponsored pension plans? . . . . . . . . . . . . 15

HR ANSWERS NOW — PENSIONS, BENEFITS, AND PAYROLL PROCESSING, 3RD EDITION 1

PENSIONS

Q: What are the main types of employer-sponsored pension plans?

Answer

Employer-sponsored pension plans are generally group arrangements under whichemployee contributions, if any, and any required employer contributions are made toan insurer, trust company, or other specifically authorized custodian to providelifetime periodic payments to employees in respect of their service with theemployer. Employers in Canada are not required to offer a pension plan. If anemployer sponsors a pension plan, then the employer must ensure that the plan isregistered in accordance with the requirements of the applicable pension standardslegislation (depending on the jurisdiction) and the Income Tax Act.

There are three main types of pension plans sponsored by Canadian employers:

● Defined benefit (DB) plans: These plans specify the amount of the member’spension benefit, usually by reference to a formula that uses some combinationof previous earnings and years of service, but can also specify the amount ofbenefit by a fixed-dollar amount for each month or year of service. However,this is subject to a maximum pension benefit allowed by the Canada RevenueAgency under existing federal income tax legislation. This type of plan requiresthe employer to pay the defined benefit and bear the financial risk. The maincategories of DB plans are final or best average earnings, career average earn-ings and flat benefit plans.

● Defined contribution (DC) plans: Also known by their older name of ‘‘moneypurchase’’ plans, these plans do not specify the amount of the member’s pensionbenefit. A DC plan is often described as being like a bank account. The benefitprovided at the time of death, termination, or retirement depends on the benefitthat can be provided with contributions (employer and/or employee) and invest-ment returns accumulated to the date of retirement. This type of plan limits theemployer’s obligation to contribute to an amount specified in the plan. Thismeans that the employee bears the financial risk (i.e., the risk that the market orthe selected investments will not perform to the employee’s satisfaction). Theemployer does still face risks with a DC plan, however, such as the legal riskthat employees will file lawsuits if the performance of their investments is low.The Income Tax Act also limits contribution rates into a defined contributionplan.

2 HR ANSWERS NOW — PENSIONS, BENEFITS, AND PAYROLL PROCESSING, 3RD EDITION

PLAN TYPES

● Hybrid plans: Also known as combination plans, hybrid plans provide bothdefined benefits and defined contribution benefits. For example, a hybrid planmay provide for a defined benefit calculated as a percentage of final averageearnings multiplied by years of service, subject to a minimum benefit equal tospecified employer and/or employee contributions, plus interest.

Q: What is the dif ference between a registered and anunregistered plan?

Answer

The term ‘‘registered plan’’ is often used to refer to a pension arrangement that isregistered under the Income Tax Act (ITA) of Canada and the pension legislation ofthe relevant jurisdiction. Registered plans qualify for special tax treatment thatgenerally permits contributions to be deducted for tax purposes by the employer inthe year they are made while contributions and earnings on contributions accumulatefree of tax to the employee. Income tax is deferred until benefits are received by planmembers. Registration under pension legislation is a requirement for preferential taxtreatment. However, the main reason provincial pension standards legislation is inplace is to protect employee rights.

Establishment and maintenance of registration requires the filing of prescribeddocuments supporting the plan with Canada Revenue Agency (CRA) and with theappropriate pension regulator.

The term ‘‘registered plan’’ may also refer to other types of plans, such asretirement savings plans, profit-sharing plans, or tax-free savings accounts thatreceive preferential tax treatment if they comply with requirements under the ITA.

Unregistered plans are those that provide employer-sponsored vehicles for sav-ings or investment, such as stock purchase plans, or some types of supplementaryretirement benefit plans, but do not have the tax sheltering aspects of registeredplans. These types of plans would also not be registered with the provincial pensionregulator.

Q: What is a registered retirement savings plan (RRSP)?

Answer

Generally, a registered retirement savings plan (RRSP) is a tax-sheltered instrumentestablished in accordance with the requirements of the Income Tax Act. Contracts


PENSIONS

that are acceptable for registration by Canada Revenue Agency (CRA) between anindividual and an insurer or trust company are set up to accept contributions from anindividual or his or her spouse for the purpose of providing retirement income.

Contributions made to an RRSP out of an employee’s earned income are withincertain limits deductible for tax purposes. Contributions and investment income areallowed to accumulate tax-free while sheltered in the RRSP. Taxpayers are alsopermitted to contribute to their spouse’s RRSP within prescribed limits. Restrictionsapply on withdrawals of money prior to maturity at age 71, although there are some‘‘excluded withdrawals’’, including those under the Home Buyers’ Plan and theLifelong Learning Plan.

Although individually established, RRSPs may also be administered on a groupbasis with an employer, union or professional association acting as a plan sponsor.Traditionally, group RRSPs have been a voluntary, convenient employee savingsprogram. More recently, however, they have come to be used as part of a sharedsavings arrangement with employer contributions being contingent upon employeecontributions.

Due to the increased complexity and administrative burden of establishing andmaintaining a pension plan, group RRSPs have become more attractive as retirementvehicles, particularly to the smaller employer.

Group RRSPs may be established with an authorized trustee by an arrangementin which a single trust is established to receive contributions, and the property heldby the trust is identifiable in respect of each individual plan member. In anotherpossible arrangement, the employer may enter into a contract with an insurer for thepayment of retirement income to be funded through a group annuity under whichcontributions and growth are attributable to each member.

Employers may establish group RRSPs that are able to accommodate locked-inpension funds, and these are known as locked-in retirement accounts (LIRAs).LIRAs can also be established by individual employees who wish to move theirpension benefits out of an employer-sponsored pension plan when they terminateemployment.

There are two main retirement income options for the use of RRSP funds thatare ‘‘locked-in’’ under pension legislation. They can be used to purchase a life orfixed-term annuity from an insurance company, or they can be used to establish anapproved registered retirement income fund under which minimum and maximumamounts of annual withdrawal are set by tax and pension legislation respectively.


PLAN TYPES

Q: What is a group registered retirement savings plan (GroupRRSP)?

Answer

A group registered retirement savings plan (Group RRSP), like its counterpart theregular RRSP, is a tax-sheltered savings vehicle under the provisions of federalincome tax legislation. However, it is often the only means a small employer canoffer its employees an affordable pension alternative and is increasingly seen bymany as a cost-effective alternative to money purchase plans.

A Group RRSP may help limit an employer’s costs, liability concerns, andadministrative burdens in comparison with traditional pension plans. They may beestablished with an authorized trustee through a single trust arrangement establishedto receive all contributions; the property held by the trust is identifiable in respect ofevery plan member. Alternatively, an insurance contract may be used by an employerfor the payment of retirement income to be funded through a group annuity, withcontributions and income applicable to each individual employee/member.

Group RRSPs can also have other applications, including the ability to accom-modate locked-in pension funds, such as locked-in retirement accounts (LIRAs),depending on the employer.

Q: What is a capital accumulation plan (CAP)?

Answer

A capital accumulation plan (CAP) is a general term for any investment or savingsplan to which an employer, employee, or both can make regular contributions andwhere employees are permitted to make investment decisions. There are manydifferent types of CAPs, which vary in their design, objectives, and tax treatment.

Some of the more common types of CAPs include:

● defined contribution pension plans (DC plans);

● money purchase plans (a more traditional name for DC plans);

● registered retirement savings plans — individual or group;

● profit sharing plans;

● stock purchase plans; and

● savings plans.


PENSIONS

Contributions to CAPs are fixed by formula or by reference to corporate profits.The amount of capital that is eventually accumulated depends on the performance ofthe underlying investments. CAPs can be used as the main source of retirementincome or as a supplement.

Given the growing importance of CAPs, the Joint Forum of Financial MarketRegulators, which is comprised of pension authorities together with regulators fromother financial areas, has finalized and issued ‘‘Guidelines for Capital AccumulationPlans’’. The guidelines are designed to ensure that members of CAPs have similarregulatory protection, regardless of the particular retirement or savings vehicle, andhave the information they need to make informed investment decisions. Theseguidelines also clarify and harmonize duties and responsibilities of employers andadministrators.

Q: What is a supplemental retirement arrangement orsupplementary employee/executive retirement plan (SERP)?

Answer

Supplemental retirement arrangements are also referred to as supplementaryemployee/executive retirement plans (SERPs). These plans provide benefits that areineligible to receive the tax-favoured status provided to registered plans because theyprovide benefits in excess of Income Tax Act (ITA) limits. Since a SERP operates inexcess of the maximum pension limits permitted by law, any investment incomegenerated inside it is not tax deductible.

Historically, supplemental retirement arrangements were only offered to thesenior executives of an employer. However, more employers are offering supple-mental pension plans to a growing percentage of their workforce as a result of taxlimits under registered pension plans and registered retirement savings plans thathave been slow to increase.

Supplemental plans generally are not required to be registered under provincialor federal pension standards legislation, and are therefore capable of flexible benefitdesign. There are no minimum funding or security requirements.

The majority of supplemental plans are unfunded arrangements under which anemployer promises to provide benefits to supplement the pension paid from theregistered pension plan subject to the employer’s financial ability to pay the benefitswhen due. The benefit may be paid as a lump sum when the employee retires, may bepaid in a series of payments, or may be paid as a monthly pension.


PLAN TYPES

When a supplemental plan is funded in whole or in part, the employer makespayments to a custodian to finance payments to the employee on the employee’sretirement. This funding arrangement is also known under the ITA as a RetirementCompensation Arrangement (RCA). Contributions to an RCA and the investmentincome earned by RCA assets attract a 50% refundable tax.

Supplemental plans may also be secured through the use of a letter of credit(LC) from a financial institution, and may be funded through the use of a lifeinsurance product. Of these two methods, the former is more common in Canada.When an employer uses an LC to secure the benefits under its SERP, an RCA iscreated. The annual premium paid to the financial institution to purchase the LC isconsidered a contribution to the RCA, and an equal amount must be paid to theCanada Revenue Agency (CRA) as a refundable tax.

Q: What is a multi-employer pension plan (MEPP)?

Answer

A multi-employer pension plan (MEPP) is generally any plan for which more thanone employer is required to contribute. Tax and pension standards legislation containspecial rules for MEPPs. MEPPs are defined somewhat differently under tax andpension standards legislation.

A multi-employer pension plan is usually found in industries where there is alarge number of small employers, or where employees frequently move amongdifferent employers in the same industry, such as construction, transportation, for-estry, and the retail trades.

A MEPP is defined in regulations under the Income Tax Act (ITA) to mean apension plan in which no single employer or related group of participating employersemploys more than 95% of the active members participating in the plan. There arespecial rules related to the calculation of Pension Adjustments for MEPPs.

Under pension standards legislation, MEPPs that are established pursuant to acollective agreement or trust agreement must be administered by a board of trustees,at least one-half of whom are representatives of the members of the MEPP, and amajority of whom are Canadian citizens. The 95% requirement found in the ITAdoes not apply to provincial pension standards legislation.

A Specified Multi-Employer Plan (SMEP) is a type of multi-employer plan withsimpler rules to determine a member’s pension adjustment than a MEPP. A SMEP is


PENSIONS

defined under ITA to be a defined benefit plan with several participating employers,not all related to each other, where employer contribution rates are negotiated and,based on those rates, the board of trustees is empowered to determine benefits thatwould be supported by those contributions, at least until the next set of negotiations.These pension plans are often set up through the collective bargaining process.

Q: What are annuities and how are they used in a pensionarrangement?

Answer

An annuity is generally defined as a sum of money paid at regular intervals. In thecontext of pension plans, a life annuity refers to an annuity purchased, usually froman insurance company, to fund pension payments for the member.

In a registered pension plan, the pension benefit at retirement must be payable inequal, regularly spaced amounts for life. In a defined benefit pension plan, this is afeature of plan design and the administrator may simply make the payments itselffrom the pension fund. It also has the option to purchase a life annuity to fund themember’s pension benefits.

In a defined contribution pension plan, the administrator is required to give theplan member the option of purchasing a life annuity using the accumulated contribu-tions and investment returns. This requirement is designed to make the conversion ofa lump sum into a pension benefit convenient and simple for the plan member.

Q: What is a deferred profit sharing plan (DPSP)?

Answer

A deferred profit sharing plan (DPSP) is a savings vehicle defined under the IncomeTax Act (ITA) to which employer contributions are made from profits, or aredetermined in accordance with profits. It often forms part of an employee savingsplan. DPSPs must be registered with the Canada Revenue Agency (CRA). Informa-tion related to registration rules is available in CRA Information Circular 77-1R5(updated August 15, 2007).

Employees are not allowed to personally contribute to a DPSP. Maximumemployer contributions are set annually by CRA. At this time, the maximum contri-bution to a DPSP is one-half of the permitted contribution to a defined contribution/money purchase pension plan. The regulatory regime also includes particular


PLAN TYPES

‘‘vesting’’ and distribution rules which often vary from the rules applicable to regis-tered pension and savings plans.

One key feature of DPSPs is the requirement that if the benefit is paid out in alump sum, it must be paid into a tax-deferred vehicle (such as an RRSP) within 90days of the death, termination, or retirement of the plan member. If this is not done,the entire amount becomes taxable to the former plan member or the former planmember’s estate.

Q: What is a f lexible pension plan?

Answer

A flexible pension plan is a defined benefit plan that allows members to makevoluntary contributions to a flexible component of the plan. Flexible pension planshave been introduced over the last decade, mainly in response to income tax rulesthat reduce the RRSP room of a pension plan member when contributions are madeby them or on their behalf to a pension plan. This reduction is known as the pensionadjustment (PA).

In a flexible plan, the voluntary contributions made to the flexible component ofthe plan are used to purchase or improve ancillary benefits at termination, retirement,or death. Such improvements do not influence the rate of the basic pension accrual,and therefore do not affect the calculation of the pension adjustment. However, sinceancillary contributions do increase the overall value of a member’s pension benefit,they are a tax efficient means of increasing retirement savings without reducingRRSP room.

Flexible pension plans generally fall into two classes. Front end flex plans offerfixed choices in advance for given amounts of contributions. Back end flex plansallow employees to make voluntary contributions into an account that will earn a rateof return and be used to purchase ancillary benefits at retirement.

Back end plans are generally viewed as being more flexible, since employees donot have to select ancillary benefits until retirement. Also, back end plans have aneutral cost, since the cost of enhancements can be set exactly equal to the value ofemployee contributions and interest. However, if the cost of the allowable ancillarybenefits at retirement is less than the flexible contribution balance, the unusedcontributions must be forfeited. The policies covering the requirements to establishan acceptable flex plan have been issued by the Canada Revenue Agency (CRA) andby the pension regulators in many Canadian jurisdictions.


PENSIONS

Q: Should employers stay away from sponsoring defined benefitplans?

Answer

One camp in the continuing debate of the merits of the defined benefit plan rejectsthis type of plan as badly suited to twenty-first century business realities. Critics ofthe defined benefit plan point to its administration and communication burdens, itsfinancial risks, and its cost. Critics also note that employers are not obliged tosupport employees for life, and highlight recent asset losses in pension funds.Finally, critics claim that as the pension system has matured in the past 20 years,significant new pension liabilities, especially for retirees, have arisen. They arguethat expensive side benefits, especially generous early retirement incentives, nolonger fit with the expected labour shortage in Canada.

The opposing camp argues that defined benefit plans continue to play animportant part in the overall benefits package from an attraction and retention pointof view, as a workforce management tool, and as a social policy encouraging incomesecurity and transition to retirement.

One approach plan sponsors have taken in recent years is to introduce innova-tive plan designs that can address changing business environments, including hybridplans, flexible pension plans, and ‘‘shared risk’’ plans where cost-of-living adjust-ments or other plan improvements are granted only at the discretion of the plansponsor or only to the extent that they can be funded without contribution increases.

Employers who are considering the establishment of a defined benefit plan, or aconversion from a defined benefit to a defined contribution plan, should review theiremployee demographics and their goals for attracting and retaining employees.

Q: Does a government pension plan integrate with anemployer-sponsored plan?

Answer

The relationship between government- and employer-sponsored pension plans isknown as ‘‘integration’’. Some defined benefit plans integrate benefits from theCanada Pension Plan/Quebec Pension Plan (CPP/QPP) either directly or indirectly,but other plans do not integrate the benefits at all.

In direct integration, the formula under the plan calls for benefits from CPP/QPP to be directly offset against the plan’s pension, and the benefit is pro-rated


PLAN TYPES

according to service to comply with minimum standards legislation. (For example,most pension jurisdictions generally require that a direct offset of a CPP/QPP benefitmust accrue over a period of at least 35 years, but some jurisdictions permit a directoffset in full without any pro-rating.)

Indirect integration of CPP/QPP benefits may occur under defined benefit planswhose formula is integrated with benefits from CPP/QPP.

Pension plan offsets based on benefits payable from Old Age Security (OAS) atage 65 are available only in plans under federal pension legislation.

Q: How does one convert a defined benefit plan to a definedcontribution plan?

Answer

Changing a pension plan from defined benefit to defined contribution transfers theinvestment risks of the plan from sponsor to employee. In converting, employers mayeither preserve the defined benefits for past service and direct new contributions tothe defined contribution component, or they may determine a conversion value forthe defined benefits and transfer them to the defined contribution plan.

In many jurisdictions, the legislation does not specifically deal with conversionsfrom a defined benefit to a defined contribution plan. However, where the legislationof a jurisdiction does govern conversion (see chart below), the legislation includesmany requirements, such as:

● notice to employees;

● treatment of accrued benefits;

● specified employee options; and

● required disclosure.

Some jurisdictions also require regulatory authorization for a conversion.

Even where there is no formal conversion legislation or policy, the conversionwill still require plan amendments, valuations, and actuarial considerations. Thecomplexity of the conversion process requires significant time considerations. Signif-icant public attention has been focused on high profile companies’ conversion.

It is possible to convert from a defined contribution to a defined benefit plan,but so far this has been infrequently done.


PENSIONS

Formal Policies Respecting Conversion from DB to DC

Jurisdiction Description

Federal ‘‘Guideline for Converting Plans from Defined Benefit to DefinedContribution ’’, issued August 2001

Alberta ‘‘Conversion of a Defined Benefit Plan to a Defined Contribution Plan ’’,Policy Bulletin #8, revised December 2008

British Columbia No formal policy

Manitoba ‘‘Conversion of a Defined Benefit Plan to a Defined Contribution Plan ’’,Pension Update #18, revised March 2005

New Brunswick 1 No formal policy

Newfoundland and Labrador No formal policy

Nova Scotia No formal policy

Ontario ‘‘Conversion of a Plan from Defined Benefit to Defined Contribution ’’,C200-101, issued June 1, 2004 (see also C200-150 and C200-700)

Prince Edward Island No formal policy

Quebec Various sections of the Act are relevant (ss. 22, 23, 62, etc.);explanation mainly found in section 22 (annotated version of SPPA) inFrench only

Saskatchewan ‘‘Conversion of a Defined Benefit Plan to a Defined Contribution Plan ’’,issued July 2010

Q: What is a stock purchase plan and a stock option plan?

Answer

A stock purchase plan is a savings/retirement arrangement that, when offered, isoften linked to the primary means of providing retirement income. This type of planis used to encourage employees to save and invest in their company stock.Employees are given a convenient method to purchase shares, almost always with anemployer subsidy such as a below-market share price or low-interest loan. Formerly,such plans were usually oriented towards senior employees, but recently such planshave become popular for larger segments of the employer’s workforce.

A stock option plan is an arrangement that grants employees an option topurchase employer stock at a set share price in the future. Stock option plans aregenerally more in the nature of long-term incentive plans for senior employees andexecutives.

1 Conversion from DB to DC or DC to DB is not a void amendment, and those conversions are deemed to create a ‘‘new ’’plan for the purposes of the PBA (ss. 12(2) and (3)).


PLAN TYPES

The stock purchase or option arrangement may be made available as part of anRRSP, or it may be unregistered.

Employee investment in company stock to fund retirement has come underclose scrutiny due to well-publicized corporate failures in the United States, whereplunging company stock values reduced employees’ savings and retirement accountslinked to stock purchase arrangements. Many employers limit the annual percentageor dollar amount of contributions to company stock purchase arrangements to amodest percentage or amount.

Q: What types of plans can accept transfers from registeredpension plans?

Answer

Pension legislation governs the ways in which a lifetime retirement income may beprovided from a pension plan and from any locked-in retirement accounts or regis-tered savings plan assets. A member may be paid directly from the RPP, maypurchase a life annuity, a locked-in retirement account (LIRA) or locked-in RRSP, alocked-in retirement income fund (LRIF), or a locked-in life income fund (LIF).

A life annuity provides a predictable, secure amount of income for life, and theinvestment and mortality risk are on the insurer that issues the annuity contract orpolicy. The life annuity, once elected, cannot be changed.

A LIRA is very similar to a locked-in RRSP. Like an RRSP, the memberaccumulates tax-deferred investment earnings for retirement and accepts investmentrisk. Unlike an RRSP, money is locked-in until retirement age and must be used byage 71 to purchase a life annuity, LRIF or LIF.

An LRIF provides flexibility and employee choice regarding the amount ofincome received in any given year. The investment risk is on the member, and thechanges in investment earnings in the prior year will affect the amount of incomeavailable in the current year. The LRIF can be converted at any time to a life annuity.

A LIF combines some of the flexibility of the LRIF with some of the certaintyof the life annuity. The annuitant can vary the annual income received. Investmentrisk is on the annuitant and changes in investment value will affect the amount ofincome available in any given year.


PENSIONS

Q: What is a jointly sponsored pension plan?

Answer

A jointly sponsored pension plan (JSP) is a defined benefit plan in which bothemployers and employees contribute to the normal cost of the plan and share theresponsibility for any unfunded liabilities. Most JSPs are in the public sector, andmany are multi-employer pension plans (MEPPs).

JSPs raise special issues with respect to methods of funding and responsibilityfor deficits. Most jurisdictions’ pension standards legislation were not written withJSPs in mind. For example, there are no pension statutes that allow employees toshare responsibility for plan deficits, or allow deficits to be funded by employeedeductions set at a level percentage of projected earnings (the preferred fundingmethod for most employees).

In August 2005, the Ontario government released a discussion paper setting outproposed changes to its pension standards legislation to take into account the specialneeds of JSPs. In the future, other jurisdictions may follow Ontario’s example.

Q: What is a tax-free savings account (TFSA)?

Answer

A tax-free savings account (TFSA) is similar to an RRSP, with some importantdifferences. Unlike an RRSP, contributions to a TFSA are made with after-tax moneyand are not deductible. Also, withdrawals from a TFSA, including any investmentincome, are done on a tax-free basis. This means that withdrawals from a TFSA donot affect any means-tested benefits, such as Old Age Security.

As of 2009, every Canadian who is at least 18 years old will be able tocontribute a maximum of $5,000 per year to a TFSA regardless of his or her income.Each year, an additional amount of contribution room will be allocated based on$5,000, increased by changes in the CPI and rounded to the nearest $5,000 in order toaccount for inflation. As with an RRSP, any unused contribution room in a singleyear will carry forward for future use. Any funds withdrawn from a TFSA may berecontributed without affecting existing TFSA contribution room.


PLAN TYPES

Q: Does everyone qualif y for government-sponsored pensionplans?

Answer

The Canada Pension Plan (CPP) (and its Quebec counterpart, the QPP) is a compul-sory and universal government-sponsored pension plan that is funded by contribu-tions from employers, employees, and the self-employed. Some employment earn-ings are not subject to CPP contributions; these exceptions include ones based on aperson’s age, type of employment, hours worked, and the minimum amount ofincome earned. However, most earnings qualify for CPP contribution, and if a personearns more than the threshold income level (referred to as the year’s basic exemp-tion), he or she will contribute. The amount of CPP retirement pension a personwould receive is based on the person’s contributions to the plan.

The Old Age Security (OAS) pension is payable in addition to the CPP, butunlike the CPP, the OAS is a flat-rate pension that is not based on contributions. Itbecomes payable to those who qualify at age 65, if they meet residency requirements.

In the previous (40th) parliament, a private member’s bill was introduced,Bill C-48, An act to amend the Old Age Security Act, that would have extendedpension benefits to individuals who have been in Canada for as little as three years(from the current minimum of 10 years to qualify for an OAS pension). It is doubtfulwhether this bill will be reintroduced, and as a reminder, successful passage of anyprivate member’s bill is questionable, at best.

It should also be noted that there are possible pension plan offsets for govern-ment pension plans integrated with private pension plans, depending on the terms ofthe plan. However, pension plan offsets on benefits payable from the OAS areavailable only in plans under federal pension legislation.


Plan Features

PageAre part-time or casual employees entitled to join a pension plan? . . . . . . . . . . . 17

Should plan participation be mandatory or voluntary? . . . . . . . . . . . . . . . . . . . . . . . . 18

What is vesting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

What is locking-in? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Is a pension fully guaranteed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Does a pension plan provide creditor protection for the member? . . . . . . . . . . . . 21

What is an ancillary benefit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Does a pension plan have to provide indexing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

What are bridging benefits? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

What is a contribution holiday? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

What is unlocking? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

When is unlocking based on non-residency in Canada allowed? . . . . . . . . . . . . . 25

When is unlocking based on shortened life expectancy allowed? . . . . . . . . . . . . 25

When is unlocking based on financial hardship allowed? . . . . . . . . . . . . . . . . . . . . 26

When is unlocking based on a one-time transfer allowed? . . . . . . . . . . . . . . . . . . . 27


PLAN FEATURES

Q: Are part-time or casual employees entitled to join a pensionplan?

Answer

If the plan is a registered pension plan, the question of when the employer must allowa part-time employee to join the plan depends on the pension legislation in thejurisdiction (see chart below). Part-time permanent employees are entitled to join theplan if the plan text provides for membership, or if they satisfy the eligibility criteriaset out in the applicable pension legislation governing the plan. The legislated criteriausually require the part-time employee to have reached a certain number of hours ofemployment and/or earnings (typically a percentage of the year’s maximum pension-able earnings for the Canada Pension Plan) over a prescribed number of years.Whether contractual part-time employees, as opposed to permanent part-timeemployees, are entitled to plan membership depends on the employment law in therelevant jurisdiction.

Membership eligibility for part-time employees in other types of retirement orsavings arrangements, whether registered or unregistered, is not governed by pensionlegislation, but may be affected by relevant employment standards legislation.

Part-Time Employee Eligibility for Pension Plans

Jurisdiction Employee Eligibility

Federal Part-time employees are eligible to become members after: (1) 24 months ofcontinuous employment with the employer; and (2) earnings of at least 35% ofYMPE in each of 2 consecutive years, or fulfillment of an alternative requirementthat, in the Superintendent’s opinion, is reasonably equivalent.

Alberta Full- and part-time employees are entitled to become members the first day of themonth following the month in which they have: (1) completed 2 years ofcontinuous employment with the employer; and (2) earnings of at least 35% ofYMPE in each of the 2 consecutive years occurring immediately before (i) thecompletion of 2 years of employment, or (ii) the year in which the employeeapplies to become a member.

British Columbia Full- and part-time employees are eligible to become members after 2 years ofcontinuous employment with the employer with earnings of not less than 35% ofthe YMPE in each of 2 consecutive calendar years.

Manitoba Full- and part-time employees must become members after a maximum of 2years. Part-time employees must become members if they were employed during2 consecutive years in each of which the employee earned at least 25% ofYMPE.


PENSIONS

Jurisdiction Employee Eligibility

New Brunswick Part-time employees may become members after 24 months of continuousemployment with earnings of at least 35% of YMPE in each of 2 consecutivecalendar years immediately before membership in the plan, or such equivalentbasis as is approved by the Superintendent.

Newfoundland and Part-time employees are eligible to become a plan member upon completion of 24Labrador months of continuous employment and earnings of at least 35% of the YMPE in

each of 2 consecutive calendar years or as approved by the Superintendent.

Nova Scotia Part-time employees may become members after 24 months of continuousemployment with earnings of at least 35% of YMPE or 700 hours of employmentwith the employer in each of the 2 consecutive calendar years immediately beforemembership in the plan, or such equivalent basis as is approved by theSuperintendent.

Ontario Part-time employees may become members after 24 months of continuousemployment with the lesser of: (1) earnings of at least 35% of YMPE; or (2) 700hours of employment with the employer, in each of 2 consecutive years in theplan or such equivalent basis as is approved by the Superintendent.

Prince Edward Part-time employees may become members after 24 months of continuousIsland employment with the lesser of: (1) earnings of at least 35% of YMPE; or (2) 700

hours of employment with the employer in each of 2 consecutive years in theplan or such equivalent basis as is approved by the Superintendent.

Quebec Employees are entitled to become members if, in the calendar year preceding theapplication for membership, they have either: (1) earnings of at least 35% of theYMPE, established for the reference year in accordance with the QPP; or (2) 700hours of employment with the employer.

Saskatchewan Part-time employees are entitled after 24 months if in each of 2 consecutivecalendar years immediately prior to the years in which the application is madethey have either: (1) earnings of at least 35% of YMPE; or (2) 700 hours ofemployment with the employer.

Q: Should plan participation be mandatory or voluntary?

Answer

Generally, participation in a registered pension plan is optional, although anemployer may make membership a condition of employment. In order to makemembership a condition of employment, the requirement must be set out in pensionplan text. Manitoba’s pension legislation, however, makes participation mandatoryfor all employees.

Under federal pension legislation, membership in the pension plan may be eithermandatory or voluntary, but if it is mandatory, it must be mandatory for allemployees within the class of employees for whom the plan was established. Ifmembership is voluntary, federal legislation specifically states that a full-timeemployee who chooses not to join the plan must be permitted to join the plan at anylater time he or she should have a change of heart.


PLAN FEATURES

Q: What is vesting?

Answer

If a member’s pension is vested, it means the member is unconditionally entitled tothe pension either now or in the future if employment is terminated before retirementage. Once the member becomes vested, the member is entitled to either an immediateor deferred pension, as opposed to simply a return of the contributions of themember. Being vested also implies that the member is entitled to the benefit of theemployer’s contributions.

The qualification for vesting in a pension plan is usually the completion of aspecified period of employment or plan membership. All of the Canadian jurisdic-tions with pension legislation in force have legislated vesting requirements, but plandocuments may provide for vesting earlier than the legal deadline.

The completion of a period of employment or plan membership and sometimesattainment of a certain age are also the qualifications for the locking-in of amember’s pension under pension legislation. A pension may be vested but notlocked-in if the plan document provides for vesting earlier than is mandated bystatute.

Q: What is locking-in?

Answer

Pension accounts that are locked-in hold money that the pension plan member cannotuse other than to provide a pension. Locked-in money cannot be withdrawn earlier orin a lump sum upon retirement.

In recent years, due to contemporary economic and health issues, pensionlegislation has tended towards exceptions to the locking-in requirement and hascreated unlocking opportunities related to circumstances such as financial hardshipand life-shortening illness, for example. Saskatchewan is the only pension jurisdic-tion to date that has totally unlocked pension-related accounts (at age 55), but otherjurisdictions are considering similar changes.

Pension standards legislation generally allows the value of the pension benefitsfrom a registered pension plan of a terminating employee to be transferred into anRRSP. However, if the pension benefits are locked-in, the transfer must be made,depending upon the applicable pension standards legislation, to either a locked-in


PENSIONS

RRSP (also known as a locked-in retirement account (LIRA)), or one of the types ofregistered retirement income funds (RRIFs), such as a life income fund (LIF) orlocked-in retirement income fund (LRIF).

Locked-in RRSPs provide the individual with investment control and are similarin operation and rules to regular RRSPs. However, they differ from regular RRSPs inthat a locked-in RRSP is locked-in until retirement age subject to a transfer toanother authorized locked-in vehicle, and the money must be used by the age of 71 toprovide retirement income (i.e., by the purchase of an annuity).

Most jurisdictions have requirements for the documentation of products that canreceive a transfer of locked-in funds. Some provinces require pre-approval of thisdocumentation and publish lists of authorized issuers.

Q: Is a pension fully guaranteed?

Answer

Pensions are not guaranteed by any legislation. Pension standards legislation requiresplan sponsors to adequately fund the benefit earned by members and to make specialpayments to the pension plan to make up any funding shortfalls. Pension legislationrestricts pension fund investments and, furthermore, requires pension funds to beheld by an authorized fund holder in ‘‘trust’’. However, there is no statutory guaranteethat the pension will actually be paid.

In most jurisdictions, a pension plan sponsor is required to fully fund all of apension plan’s obligations upon plan termination within five years. However, inNewfoundland and Labrador, Saskatchewan, and the federal jurisdiction, a plansponsor is only required to fully fund the amounts that were due up to the date ofwind-up.

Ontario is the only jurisdiction in Canada to establish an insurance fund topartially guarantee pension benefits. The Pension Benefits Guarantee Fund wasestablished to guarantee Ontario pension benefits (i.e., those relating to service inOntario) up to certain limits in the event of a plan wind-up. There are specific criteriafor eligibility for the fund, and the fund only insures certain types of pension benefitsthat are set out in the Ontario Pension Benefits Act and its associated regulation. TheOntario Pension Benefits Act indicates that if the assets of the guarantee fund areinsufficient to pay claims, the government of Ontario may authorize loan amountsout of the provincial revenue in order to cover the claims.


PLAN FEATURES

One funding medium available to an employer that provides a guaranteedbenefit is the purchase of an annuity contract from an insurer to deliver pensionbenefits. Insurers’ obligations are backed up by the insurance guarantee program.The coverage provided under the program has specific eligibility criteria and benefitlimits.

Q: Does a pension plan provide creditor protection for themember?

Answer

The existence of creditor protection in respect of Canadian retirement and savingsplans depends on the type of plan, the type of creditor, and the jurisdiction, if any,that governs the plan. In addition, the protection may also depend on the varyingcourt rulings in different jurisdictions as these evolve over time.

For registered pension plans, pension legislation generally protects the pensionbenefit while it remains in the plan or in a vehicle that has accepted the transfer oflocked-in pension funds, including locked-in RRSPs, but does not extend this protec-tion once the member begins receiving the income stream from the pension benefit.One exception to this general creditor protection found in most jurisdictions is whenthe creditor demand comes in the form of a family law support order or similarlegislation. Under this circumstance, creditor protection of money payable under aplan does not exist. Another exception to protection of pension funds is a demand bythe Canada Revenue Agency (CRA), for tax arrears, for example.

For RRSPs that have not received locked-in funds under pension legislation,there are some circumstances under which creditor protection may exist for the planitself or for the assets under the plan. For example, a group RRSP that is funded byan insurer may have the potential protection afforded to life insurance under provin-cial insurance legislation. This protection will often depend on the nature of thebeneficiary, if any, that the member has designated. A group RRSP issued by a trustcompany may also gain creditor protection in jurisdictions that have legislationspecifically for that purpose, or under a type of legislation that extends protection toan employer-based plan on the death of the member.

For unregistered savings plans, such as stock purchase or stock option plans,creditor protection likely does not exist, either during the member’s lifetime or uponthe member’s death. However, some provinces have legislative schemes that might


PENSIONS

extend protection on the death of the employee to an employment-based benefit suchas a stock purchase plan.

There are a range of creditors that might expressly demand the member’s planassets; for example, the member may have a tax debt, be in arrears of child support orspousal support, or may have become bankrupt and subject to the administration of abankruptcy trustee. Depending on the nature of the creditor, the member may havevarying protection from the creditor demand.

Courts in different jurisdictions have added to the complexity of the question ofcreditor protection. Some jurisdictions have readily extended the same protection togroup insurance products as exists for individual insurance products; other jurisdic-tions have required a showing that the group insurance product exhibit ‘‘annuity-like’’features.

Q: What is an ancillary benefit?

Answer

‘‘Ancillary benefit’’ is a general term for those defined benefit pension plan benefitsthat supplement the basic and required benefits. The basic benefit under a definedbenefit plan refers to the specified monthly payment provided by the plan. Pensionstandards legislation mandates the provision of certain benefits supplementing thebasic benefit, such as early retirement benefits, death benefits and spousal benefits.

Some types of ancillary benefits are disability benefits, bridging benefits, subsi-dized early retirement benefits, subsidized postponed retirement benefits and supple-mental benefits payable for a temporary period of time.

The ancillary benefits that may be offered under a plan are restricted by pensionand tax legislation. Some jurisdictions, depending on the requirements of the plan,may mandate inclusion of ancillary benefits in the member conversion value uponconversion from a defined benefit to a defined contribution plan.

Q: Does a pension plan have to provide indexing?

Answer

Except for pension plans registered in Quebec, to date no pension plan is required toprovide indexing or inflation protection in order to comply with pension standardslegislation.


PLAN FEATURES

However, many plans protect pensioners from loss over time by indexingpensions according to a wage or price index. For example, pensions that increase 1%for every 1% increase in the Consumer Price Index (CPI) maintain their purchasingpower to the extent that the CPI is a good measure of the prices of goods and servicesthat pensioners buy. Pensions that increase in line with increases in the averageindustrial wage are more generous, keeping pensions in line with the pay rates ofactive employees.

In Quebec, legislation provides for partial inflation protection between the datethe employee ceases active membership in the plan until the date that is 10 yearsprior to the normal retirement date, based on 50% of the Consumer Price Index to amaximum of 2%.

Employers with plans that do not index may compensate for post-retirementcost-of-living increases by means of ad hoc adjustments made on a one-time-onlybasis, with no promise of future increases.

Q: What are bridging benefits?

Answer

A bridging or bridge benefit is an amount paid at any time during the period afterearly pension commencement until the member attains age 65. This allows anincome supplement to be paid until the member can collect Old Age Securitybenefits and the full, unreduced Canada Pension Plan retirement pension.

The Income Tax Act restricts the maximum amount of bridge benefits that maybe paid from a defined benefit pension plan based on the amount of the member’slifetime pension.

Generally, the maximum bridge benefit for a member who is age 60 and hascompleted 10 years of service is the combined amount of CPP and OAS benefits themember would be entitled to receive if he or she were 65 at the date the bridgebenefit commences. The maximum may be reduced by a certain monthly percentageif the eligibility criteria are not met.

Q: What is a contribution holiday?

Answer

Contribution holidays may occur only under defined benefit plans. The term refers toa period during which the employer is either required to or has an option to stop


PENSIONS

contributing to the pension plan. (In a contributory plan, employee contributionsduring an employer contribution holiday may or may not be suspended as well.)

The financial circumstances under which a plan may declare a contributionholiday is when the actuarial valuation report indicates that the plan is fully fundedand has excess cash. The plan text must provide for the ability to take a contributionholiday, directly or indirectly, if the employer wishes to do so.

Pension jurisdictions vary in their approach to contribution holidays. Generally,contribution holidays are permitted, but several provinces require that the plan textspecifically allow employee contributions. Several provinces also require the plansponsor to disclose contribution holidays to members. Saskatchewan requires regula-tory approval before the employer can take a contribution holiday.

The Canada Revenue Agency (CRA) and the Income Tax Act require a plansponsor to stop making employer contributions when excess money in the planexceeds a specified level. This does not force the employer to take contributionholidays where the plan text or pension standards legislation forbids it. Besidestaking a contribution holiday, other methods of using the excess money includegiving the employees a contribution holiday, improving benefits under the plan,paying out surplus money to employees, or withdrawing the surplus from the planand/or sharing the surplus with the employees, if the plan text and pension legislationpermit employer surplus withdrawals.

A significant number of legal disputes have arisen in the past decade concerningwhether or when the employer is entitled to take a contribution holiday.

Q: What is unlocking?

Answer

In recent years, in response to or in awareness of contemporary economic and healthissues, pension legislation has created a number of exceptions to the locking-inrequirement, thus allowing plan members and former plan members to immediatelyaccess their money and control it unconditionally. Unlocked funds are consideredtaxable income unless they are transferred to a tax-deferred account such as aregistered retirement savings plan (RRSP) or registered retirement income fund(RRIF).


PLAN FEATURES

Different unlocking options may be available from pension plans than areavailable from locked-in accounts such as a locked-in RRSP, locked-in retirementaccount (LIRA), life income fund (LIF), or locked-in retirement income fund (LRIF).

The main types of unlocking are:

● non-residency in Canada;

● shortened life expectancy;

● financial hardship; and

● one-time transfer.

Q: When is unlocking based on non-residency in Canada allowed?

Answer

A number of jurisdictions allow former members who are no longer resident inCanada to withdraw their pension funds or locked-in accounts (‘‘unlocking’’). Suchprograms currently exist in Alberta, British Columbia, New Brunswick, Quebec, andfor federally regulated plans.

The test for non-residency varies. The former member may be required to obtaina letter from the Canada Revenue Agency confirming non-resident status, or themember may simply be required to have ceased residency for two years. A spousalwaiver may also be required.

Plan administrators should check the current requirements for the applicablejurisdiction when a member makes a request to unlock pension funds based onnon-residency in Canada.

Q: When is unlocking based on shortened life expectancyallowed?

Answer

Every pension jurisdiction allows a pension plan to contain a provision allowing amember or former member who has an illness or physical disability causing short-ened life expectancy to make a full or partial withdrawal of funds (‘‘unlocking’’).Shortened life expectancy unlocking may also be allowed from locked-in retirementsavings vehicles.


Documents

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