DPSPs allow employers to set aside certain amounts of a company’s profits to benefit some employees. The company chooses which employees will become members of a DPSP. This is usually an incentive for employees who are not major shareholders. Employees who own more than 10% or common shares of the corporation are not eligible to be part of a DPSP. With DPSPs the corporation makes the entire contribution on behalf of the employee. All the contributions are tax deductible by the employer as long as they don’t exceed 18% of the employee’s salary for whom the contributions are made. DPSPs can also be used to supplement to a company’s Group RRSP.
There is a maximum amount, which an employer may contribute and it is equal to 50% of the maximum contribution to a defined pension plan.
DPSP contributions do not come under the control of the employee immediately. Once the contributions vest with an employee, then the employee has control of the plan. Amounts allocated to a member’s account must vest to the member after two years of membership in the plan, or earlier if the plan allows it. A DPSP may give members the right to withdraw vested benefits from the plan at any time. However a member’s benefit must be paid no later than 90 days after the earliest of:
- Death of the member
- Termination of employment of the member
- Attainment of age 69
- Termination of the plan
Assets of a DPSP may be withdrawn in the following ways:
- Lump-sum payment
- Payments from a term-to-90 annuity
- Equal annual payments that do not exceed a period for 10 years
- Transfer to another DPSP or Registered Pension Plan
- Payments from a life annuity starting before the 69th birthday of the beneficiary and guaranteed for a period for no longer than 15 years.
Any contributions that are not vested in an employee must remain in the plan once the employee leaves the corporation. These amounts are known as forfeitures and they may be returned to the employer. The employer must then include this as income to the company in the year the forfeitures are returned. The employer may also reallocate the forfeitures to other employees in the plan.
Some of the highlights of a Deferred Profit Sharing Plan include:
- Only employer contributions are permitted into the plan
- Employer contributions are not subject to payroll taxes
- The employer may impose a vesting period of up to 2 years
- Withdrawals can be restricted to termination, death and retirement
- Owners or relatives of owners cannot participate in the plan
- Terminated employees can withdraw the full vested amount subject to taxation
- Creates a Pension Adjustment (PA)
- Can be used to share profits with employees or as a pension plan