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Registered Pension Plans (RPPs)Frequently asked questions
1. What is the "growing in" rule and how does it apply to a member who retires early, in accordance with paragraph 8503(3)(c) of the Regulations, but elects a deferred pension? Variable X is the amount of the member's unreduced lifetime retirement benefits. Variable Y is the number of months from the day lifetime retirement benefits (LRB's) commence to be paid to the day that is the earliest of the day that a member could have retired with an unreduced pension. One of these factors permit a member to retire without reduction if the combination of their age and early retirement eligibility service total 80 points. By combining age and service in reducing the member's LRB's, each month in the period between the day payment of LRB's commence and the day an unreduced pension could have been paid had the member continued in employment counts as two points. The effect, called the growing in rule when it is applied during a deferral period, is that component Y of the reduction is reduced by half when compared to a reduction based only on age or service. Example: A member retires at age 46 with 12 years of service. The member elects to defer receipt of their pension until age 57. The member's age, combined with the Y factor is equal to 80. (The member is 57, plus 12 years of service, plus another 11 years of deferral, total 80). The legislation does not require the member's pension to be reduced at age 57. 2. For the purposes of determining maximum early retirement benefit levels, subparagraph 8503(3)(c)(iii) defines "early retirement eligibility service" to include a "period throughout which the member was employed by an employer who has participated in the plan". Would this period include leaves of temporary absence and periods of layoff, subject to recall? Subparagraph 8503(3)(a)(iii) of the Regulations permits an eligible period of temporary absence, which includes a leave of absence or a period of layoff, to be included as eligible or pensionable service under a pension plan. If the terms of a plan as registered include in pensionable service periods of lay off and leaves of absence, these periods may be included as pensionable service for early retirement eligibility purposes. It is a question of fact as to whether the employee/employer relationship has been severed in a particular situation. An opinion as to whether this relationship has been severed would be determined on a case by case basis. 3. Can a registered pension plan administrator increase the joint and survivor option from a 60% to a 66 2/3% survivor pension after the member has commenced receiving pension benefits? Paragraph 8503(2)(a) provides that lifetime retirement benefits must be payable in equal and periodic amounts. There are some exceptions to this rule, for example, benefits may be adjusted for inflation, or reduced upon the death of the member's spouse. Paragraph 8503(2)(d) and subparagraph 8503(2)(a)(i) do not provide that the surviving spouse's benefit must meet the equal and periodic rule and do not prevent such an increase. Although the value of the benefit would increase and additional funding would be necessary, the Regulations permit such an increase. 4. Paragraph 8503(3)(g) of the Regulations limits the accrual rate of a defined benefit plan to 2%. In a 2% plan that provides a joint and survivor pension with a 5 year guarantee, would CRA allow a member to choose an optional Life only pension? The actuarial equivalent of this optional form of pension might exceed 2%. 5. A member terminates from their registered pension plan in 1995 and immediately transfers the commuted value of their benefits to an RRSP, in accordance with the Income Tax Act and Regulations. In 1999, the plan is wound up and there is an actuarial surplus in the plan. The employer decides to provide ancillary benefits to the plan members with this surplus. Can the member transfer the value of these ancillary benefits to their RRSP, even though they have already transferred the commuted value of their benefits out of the plan? If the members had terminated after 1996, they may only have these stand alone ancillary benefits provided in respect of pre-1990 service. This is to ensure that these individuals are not provided with benefits that, had they been provided before the first termination, would have affected the determination of PAR. 6. Bill C-23 introduced the term "common-law partner", which is defined as two persons who cohabit in a conjugal relationship and have done so for at least one year, or two persons who are the parents of a common child and cohabit in a conjugal relationship. How does this new definition affect the registration of pension plans? 7. Will this new definition apply retroactively to registered pension plans? 8. Can the survivor benefits be transferred to same-sex (common-law) partners? 9. The Regulations require that the plan administrator has to report the PAR amount to both CRA as well as to the employee. What are the plan administrator's obligations if the T10 that was mailed to the employee is returned because of an incorrect address? The plan administrator still needs to send a copy to CRA. CRA will match the T10 with the employee's Income Tax Return and advise the employee of their increased RRSP room in their notice of assessment. 10. Would a plan amendment that alters the amount of pension being paid to retired members violate the "equal and periodic rule" of paragraph 8503(2)(a) of the Regulations? Such an amendment will be accepted only if the change in the amounts of benefits is done on a prospective basis, and do not provide benefits in excess of what the Income Tax Act would have permitted at commencement date. Catch up payments will not be accepted. Built-in plan provisions that would allow pensions in pay to be automatically altered would violate the equal and periodic rule and will not be accepted. 11. There is a new trend where certain Individual Pension Plans are being established primarily to accept a transfer of funds from a prior registered pension plan. What is the CRA's opinion of these plans? The primary purpose of every registered pension plan must be to provide retirement benefits to individuals in respect of their service as employees. This requirement is reflected in the Act as a condition of registration. If it is determined that a plan is established for a reason other than this primary purpose, it will not qualify for registration under the Act. The first issue we have with these arrangements is the legitimacy of the employee/employer relationship. Our concern is that the reason the corporation and the pension plan are being established is to avoid the transfer rules of the Act. If there is not a bona-fide relationship that has the employee rendering legitimate services to the employer, the plan will fail the primary purpose test. Even if this relationship is established and nominal earnings are received, there may still be an issue with the primary purpose test. The Act only permits a pension plan to base retirement benefits on the earnings received from an employer who participates in the plan. In most cases, the earnings with the new corporation are much lower than what was received with the prior employer, and therefore the benefits under the IPP are significantly lower than the benefits that the individual would have received from the prior plan. This creates a large surplus in the IPP. When an individual foregoes a substantial retirement benefit by transferring the associated funds to a recently established IPP that provides a much smaller retirement benefit, it can be argued that the primary purpose test is not met. In these cases, we may conclude that the primary purpose of establishing the IPP was to facilitate a transfer of funds from a prior plan that would have been limited by the Act had it been transferred to an RRSP. The conclusion that the primary purpose condition is not met is further supported by the fact that following the transfer, the IPP holds significant surplus assets rather than providing retirement benefits of a level comparable to those that would have been paid from the prior plan. As mentioned earlier, if the primary purpose of a plan is for any reason other than providing retirement benefits with respect to the individual's service as an employee, the plan will fail to qualify for registered status. If it is apparent at the time of registration that the IPP will not meet the primary purpose test, the CRA will refuse to register the pension plan. Unfortunately, in many cases, it will not be apparent until a year or two later that the primary purpose test was not met. This situation can be more problematic for individuals as they may have already transferred funds into the IPP. If it is determined that a registered plan does not, and never did, meet the primary purpose test, the plan's registered status can be revoked as of the original effective date. . The consequences to the member could be financially devastating if the CRA was to revoke the registration of the plan upon discovering that the purpose for incorporating a company was simply to establish a pension plan to hold the transferred pension for a specific member. The impact of this action is that all the assets of the plan would become taxable. It is for this reason that we want to ensure that individuals are made aware of these concerns. We will be asking individuals for evidence of the following:
If these facts cannot be confirmed, we will consider that the plan does not meet the primary purpose and it will not be registered. FSCO - Individual Pension Plans 12. Under a defined benefit provision, can a guarantee period be attached to a member's pension when a joint survivor option is elected with a dependant as the beneficiary? Where retirement benefits, permissible under paragraph 8503(2)(d), are also provided under the provision to a spouse or former spouse of the member, clause 8503(2)(c)(i)(A) limits the guarantee period to 5 years. Paragraph 8503(2)(k) permits the 5 year guarantee to be increased to 15 years on an actuarial equivalent basis, which means that the member has to forego a portion of their lifetime retirement benefits to get the increased guarantee. 13. What is a multi-employer plan (MEP)? We consider a registered pension plan to be a MEP if, at the beginning of the year, it is reasonable to expect that at no time in the year will more than 95 % of the active plan members be employed by a single participating employer, or by a group of related participating employers at any time during the year. The terms "related persons" and "related group" are defined in subsections 251(2) and 251(4) of the Income Tax Act, respectively. Additional information can also be found in Interpretation Bulletin IT-419R Meaning of Arm's Length. What is a specified multi-employer plan (SMEP)? A SMEP is a MEP that meets the following conditions:
A plan will also be a SMEP if:
We only designate a plan to be a SMEP if it has many of the characteristics described above and the designation is needed to overcome serious pension adjustment (PA) reporting difficulties. Typically, this designation will only be given when it is reasonable to expect that at least 15 employers will contribute to the plan in the year OR at least 10 % of the active members will be employed by more than one participating employer. 14. Is it possible to index a member's accrued benefits on the basis of Consumer Price Index (CPI) during a pre-retirement deferral period? 15. When the terms of a registered pension plan (RPP) are amended to incorporate the requirements of Quebec's new additional pension benefit, what does the Registered Plans Directorate require for the amendment to be acceptable? The value of the additional pension benefit must equal the difference between:
This amount is calculated when the member ceases to be an active member of the plan. The value of this amount is then used to increase the pension benefits and, ideally, would not result in a past service pension adjustment. In most cases, Quebec's Supplemental Pension Plans Act requires that the value of the additional pension benefit be used to upgrade lifetime retirement benefits. If the upgrade is made to the accrual rate in the plan (for example, an increase to the percentage of an earnings based plan or an increase to a flat benefit rate), we will require an amendment identifying a definite formula. This position is spelled out in Information Circular 72-13R8, Employees' Pension Plans, and the Income Tax Regulations and applies to both the pre- and post-pension reform periods. If the upgrade is made to something other than the accrual rate, we will accept plan terms that identify a list of possible upgrades as long as they are permitted under the Income Tax Act. Employees will then be able to choose any of these upgrades without further plan amendment. This is similar to the treatment given to flexible pension plans. As an alternative, we will accept plan terms that allow this value to be paid out as a lump sum. We will not accept any amendments that have a general reference to what is acceptable under the Supplemental Pension Plans Act and the Income Tax Act. If you have questions about the options permitted by the Régie des rentes du Québec, contact them directly. For information on how to contact the Régie des rentes du Québec, visit www.rrq.gouv.qc.ca/an. 16. Can a defined benefit pension plan provide for a series of marginal rates which under most salary ranges and circumstances produce a benefit accrual rate that is less than 2%. 7.3% of salary below the YBE 5.5% between the YBE and YMPE 7.3% above the YMPE Benefit Rate : 30% of contributions Contributions are limited to 6.67% of salary Some salary ranges will produce an "equivalent benefit accrual rate" in excess 2% Salary range above the YMPE : 30% of 7.3% = 2.19% YBE = Year's Basic Exemption ($3,500) YMPE = Year's Maximum Pensionable Earnings Answer: As in this example, where the Employee contribution rate has a bearing on the annual defined benefit accrual rate, despite the fact that the annual accrual is limited to 2%, we would not accept such a benefit rate. If the plan text is ambiguous or uses the employee contributions as the basis for determining the benefit accrual rate (30% x 7.3%) and the equivalent benefit accrual rate exceeds 2%, we do ask for amendments. Where there is more than one contribution rate, then each equivalent benefit accrual rate can not exceed 2%. Similarly, in cases where the benefit accrual rate is based on earnings and there is more than one benefit accrual rate, then each benefit accrual rate cannot exceed 2%. For example, a plan formula of 1% of earnings up to YMPE plus 2.2% of earnings above YMPE would not be acceptable even if the benefit was capped at 2% of earnings. The reason we ask for amendments is to ensure compliance with Regulation 8503(3)(g) and reduce any ambiguity in the benefit accrual formula used in pension plans. This measure ensures that there is some degree of clarity between the employee contribution rate, the benefit accrual rate and their interaction with the maximum pension rules of 8504. Our primary concern is keeping the plan terms understandable for members and administrators with regards to the limits. 17. On February 27, 2004, the Department of Finance released a revised draft amendment to the Income Tax Regulations (the Regulations). This amendment introduced variable benefits that can be paid directly out of a money purchase provision, similar to the minimum amount that is paid out of a RRIF. These amendments were published in Part II of the Canada Gazette on September 21, 2005. How do these new variable benefits work? Section 8506 of the Regulations has been amended to allow for payments to be made out of a money purchase provision in the same way that payments may be made out of a registered retirement income fund (RRIF). Paragraph 8506(1)(e.1) permits funds from a money purchase provision of a registered pension plan (RPP) to directly pay out retirement benefits (referred to as "variable benefits") to a member, and then to the member's beneficiaries after his or her death. The amount of the variable benefits payable each year to the member must not be less than the minimum amount determined under subsection 8506(5) of the Regulations. The minimum amount is based on the balance of the amount in the member's account at the beginning of each year and the age of the member or the member's spouse or common-law partner. The factors used to calculate the minimum amount are listed in the table in subsection 7308(4) of the Regulations. The rules for calculating the minimum amount under a money purchase provision are similar to the rules for determining the minimum amount payable under a RRIF. With the introduction of variable benefits, plan administrators will have another option for paying funds from the plan. If they wish to allow for these types of payments, they will have to amend their plan terms to incorporate the changes. If an employer wants to permit variable benefits to be paid out of a money purchase provision, what amendments are required to the plan terms to make them acceptable to the Registered Plans Directorate? The Registered Plans Directorate may accept the plan terms of a money purchase provision with regard to variable benefits if the following requirements are met:
Since each money purchase provision can be unique, other plan amendments may be required in order for the amendment(s) to be acceptable to the Registered Plans Directorate. If we currently have a self-insured plan that was approved by the Registered Plans Directorate, do we have to amend our plan terms to incorporate these proposed changes? No. There is a grandfathering provision under paragraph 8506(2)(g) of the Regulations for existing self-insured money purchase plans. This provision allows retirement benefits that were provided under an arrangement accepted by the Directorate before February 27, 2004, to continue to be acceptable. |
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