Adding a Group Retirement Plan to Benefits Already in Force

Almost nobody buys a benefits plan and a retirement plan in the same year. The health and dental coverage goes in first, because somebody asked for it or because a competitor offered it, and because the absence of it is felt within weeks of hiring. Retirement saving solves a problem nobody feels this year, so it waits. Then the payroll grows, a good employee leaves for a firm that matches contributions, and the question finally arrives: can we add retirement to what we already have. The answer is yes, and the harder question is which of four arrangements to add, because they are not variations on a single idea. A group registered retirement savings plan, a deferred profit sharing plan, a pooled registered pension plan and Quebec’s voluntary retirement savings plan differ on who may contribute, on what payroll does with the money, on when the employer’s share becomes the employee’s, on whether it can be withdrawn, and on what it takes out of the employee’s own room. This page sets out those differences and how the addition is actually made.

Why the retirement question arrives second

Group benefits solve a visible problem. Somebody needs a prescription filled, a tooth crowned, a pair of glasses, and the absence of coverage is noticed within weeks of a hire. Retirement saving solves a problem nobody feels this year, which is why it is nearly always second in the queue, and why the employers who finally add it are usually reacting to a departure rather than acting on a plan.

That sequence has one genuine advantage and one real cost. The advantage is that the employer already has an adviser, a payroll process, an enrolment habit and a renewal cycle, so the savings arrangement is bolted onto machinery that is already turning. The cost is that the insurance side and the savings side of a file are frequently held by different people who never speak, and nobody owns the whole. Deciding who does is worth more than the choice between the arrangements below.

The group registered retirement savings plan

A group RRSP is not a group anything in the legal sense. It is a collection of individual registered retirement savings plans, one per employee, administered together and funded through payroll deduction. It is governed by the registered savings rules of the Income Tax Act rather than by pension legislation, and that single fact explains almost everything that follows from it.

Because each account is the employee’s own plan, the money in it is the employee’s from the moment it lands. There is no vesting period to serve, no pension regulator standing behind it, and no statutory locking. Many employers find that last point uncomfortable, since an employee can in principle withdraw the employer’s contribution, and plans are often written with a contractual withdrawal restriction for exactly that reason.

The advantages are real and mostly administrative. It is quick to set up, the employee sees the deduction and the deposit in the same pay period, and the whole thing is portable in the plainest sense: it is already the employee’s own plan, so leaving the employer does not disturb it. The complications are in what payroll must do with the employer’s share.

The deferred profit sharing plan, and why it is rarely alone

A deferred profit sharing plan is the arrangement most employers have heard of and fewest can describe. It is registered under section 147 of the Income Tax Act, and its defining feature is that only the employer may contribute to it. Paragraph 147(2)(a.1) restricts contributions to those made by an employer for the benefit of employees, which means an employee cannot put a dollar of their own into it however much they might want to.

Two further rules shape how it is used. Benefits must vest irrevocably no later than 24 consecutive months of membership in the plan or a predecessor plan, under paragraph 147(2)(i), which gives an employer a defined and lawful retention period and no more. And paragraph 147(2)(k.2) bars persons related to the employer and specified shareholders from being beneficiaries, which is why an owner manager who assumes the plan is for them is corrected early.

The tax treatment is the reason the arrangement survives. Employer contributions are deductible under subsection 147(8), are not included in the employee’s income when made, and are taxed in the employee’s hands on receipt under subsection 147(10). Set beside a group RRSP, where the employer’s contribution is employment income the moment it is paid, the difference is not cosmetic, and it is why the two are so commonly registered together.

The pooled registered pension plan

The pooled registered pension plan was created to give small employers access to a pension style arrangement without becoming a pension administrator. Under the federal Pooled Registered Pension Plans Act the plan is run by a licensed administrator rather than by the employer, and section 4 applies the Act to included employment, which is federal works, undertakings and businesses along with the territories. Most provinces enacted their own enabling legislation, so availability depends on where the employees actually work.

Membership is designed to happen by default. Section 39 makes employees in a participating class members of the plan, and section 41(5) lets an employee end that membership by notifying the employer within 60 days of receiving notice. The employer is not obliged to put money in: section 29 requires the contract with the administrator to set out employer contributions "if any", which is the Act conceding in three words that many employers will contribute nothing and simply provide the vehicle.

The feature that distinguishes it from a group RRSP is locking. Section 47(1) provides that funds in a member’s account are locked in and not withdrawable, with narrow exceptions in section 47(2) that include disability and a small account balance. An employer who wants the employer contribution to stay put until retirement has a statutory answer here rather than a contractual one.

Quebec’s voluntary retirement savings plan, and who it binds

Quebec did not adopt the pooled registered pension plan. It legislated its own version, the voluntary retirement savings plan, and it did something the rest of the country did not: it made offering one compulsory. Section 45 of the Voluntary Retirement Savings Plans Act requires an employer with five or more eligible employees to subscribe to a plan and to enrol those employees automatically.

The definition of an eligible employee decides who is counted, and it is narrower than employers expect. Under section 45 an eligible employee is 18 or over, is an employee within the meaning of the Quebec labour standards legislation working in Quebec, and is credited with one year of uninterrupted service. A firm of fifteen people with high turnover may have fewer than five eligible employees at a given moment, and a firm of seven long serving staff plainly does.

The obligation is to offer, not to fund. Section 57 states that an employer is not required to contribute to the plan but may do so. And it falls away where employees already have what the Act treats as an adequate alternative: section 45 excuses enrolment for employees who may contribute by payroll deduction to a designated registered retirement savings plan or a designated tax free savings account, or who belong to a class covered by a registered pension plan. That is the route many Quebec employers take, because a group RRSP discharges the duty.

For the employee, two provisions matter. Enrolment is automatic under section 48, with 60 days to refuse under sections 19 and 55, and a member may set a contribution rate of zero per cent under section 56. And section 65 splits the account in two: employer contributions to the locked in account, member contributions to the not locked in account.

Employer contributions and what payroll does with them

This is the section that decides the design, and it is the one least often explained to the employer who is choosing. The Canada Revenue Agency treats an employer contribution to an employee’s RRSP or group RRSP as a taxable benefit to that employee, and as pensionable for Canada Pension Plan purposes, with the cash and non cash characterisation turning on whether the employee is able to withdraw the amounts before retirement or before employment ends. The contribution therefore passes through payroll and is reported.

Employer contributions to a registered pension plan and to a pooled registered pension plan are not a taxable benefit to the employee. Neither is a contribution to a deferred profit sharing plan, which is taxed only when the employee receives it. The consequence is blunt: two employers spending the same total amount on the same employee can deliver different net results depending on which arrangement the money passes through.

That is the whole reason the pairing became the default in small and medium employers. The employee contributes to the group RRSP through payroll deduction, and the employer contributes to the deferred profit sharing plan, which keeps the employer’s share out of the employee’s current income and gives a vesting period the group RRSP cannot provide. The arithmetic, and the Quebec provincial payroll treatment which does not always follow the federal, belong with a qualified tax professional.

Vesting and locking in are two different questions

These two words are used interchangeably in benefit summaries and they mean entirely different things. Vesting answers when the employer’s contribution stops being conditional and becomes the employee’s property. Locking answers whether the employee, having become the owner, can take it out in cash before retirement. A plan can vest immediately and still be locked, and a plan can be unlocked and still take two years to vest.

Across the four arrangements the pattern is clear enough. A group RRSP vests immediately, because the account is already the employee’s own registered plan, and no statute locks it, which is why employers reach for a contractual restriction instead. A deferred profit sharing plan must vest no later than 24 months of membership under paragraph 147(2)(i). A pooled registered pension plan is locked in by section 47(1). In a Quebec plan the employer’s share sits in the locked in account under section 65 and the member’s share does not.

For an employer the practical question is what behaviour is being paid for. A vesting period rewards staying and is felt by the employee who leaves at eighteen months. Locking has nothing to do with retention: it protects the retirement purpose of the money from the employee’s own present tense. Employers regularly ask for one and receive the other.

What it takes out of the employee’s own room

Every arrangement here reaches into the employee’s personal registered savings room, and the mechanism differs. A group RRSP uses the employee’s registered retirement savings plan deduction limit directly, dollar for dollar, exactly as a personal contribution would. The Canada Revenue Agency states that all contributions to a pooled registered pension plan account, employer contributions included, likewise count against the member’s registered savings room.

A deferred profit sharing plan works indirectly. The Canada Revenue Agency states that a contribution made on an employee’s behalf in a year reduces that employee’s registered retirement savings plan contribution room for the following year, through the pension adjustment reported on the employee’s slip. A registered pension plan produces the largest pension adjustment of the four, which is exactly what one would expect from the arrangement that is actually a pension.

The practical failure this causes is annual and avoidable. An employee joins a plan at work, contributes personally the following February on the strength of a room figure that no longer holds, and discovers the excess later. The figure to trust is the one on the current notice of assessment. What happens if the number is wrong is set out in RRSP Contribution Room and Over Contribution.

How the addition is actually made

The mechanics are less daunting than the choice. The employer settles the objective first, and the honest objectives are few: retaining people, matching what competitors offer, discharging a legal duty in Quebec, or giving employees a savings habit that payroll makes effortless. Those four point at different arrangements, and an employer who cannot say which one applies will be sold whichever is easiest to install.

Then the vehicle is selected, the employer formula and its conditions are written, the plan is registered or subscribed to, employees are enrolled, and payroll is amended to carry the deduction and, where the arrangement requires it, the reporting. None of this depends on the benefits renewal date, though aligning the two is convenient.

The step employers underestimate is the last one. A savings arrangement nobody joins is an expense with no retention effect whatever, and enrolment rates depend almost entirely on whether somebody stood in a room and explained the thing in plain words. Automatic enrolment, which the pooled registered pension plan and the Quebec plan both use, exists because that conversation so often does not happen.

The questions to settle before anything is signed

For the employer: what is the contribution formula and on what condition is it paid; when does it vest and what does that cost in turnover terms; is it locked and is that what was actually wanted; what does payroll have to do with it each period; and in Quebec, does the chosen design discharge the section 45 duty or sit beside it.

For the employee: whose money is in the account and from when; can it be reached before retirement and on what conditions; how much of my own registered room does it consume and when will that show up; what happens to the employer’s share if I leave in two years; and who is answerable if the statement stops making sense.

None of those questions is answered on a page like this one. They are answered in the plan documents and in the contract with the administrator, and the tax and payroll consequences belong with a qualified tax professional. What a page can do is establish that the questions exist and that an arrangement chosen without asking them is chosen by whoever is selling it.

Frequently Asked Questions

Continue Learning

Start with Group RRSP, DPSP or Pension for what each arrangement is from the employee’s side, then Which Group Benefits Are Taxable for the same who pays the premium logic applied to the insurance half of the plan. RRSP Contribution Room and Over Contribution covers the mistake a first year member makes most often, and Group Benefits for a Small Business sets out the arrangement the retirement side is being added to. The Group Insurance guide holds the whole picture together.