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Using DPSP in Group Savings Plans

With savings rates at an all-time historic low in Canada, employees and employers have an increased interest in launching group savings plans.

The purpose of group savings plans is to help plan members with a convenient way to put money aside for retirement. Unfortunately, it often takes an employee who is assumed to be retirement ready admitting that they simply don’t have the financial resources to start enjoying their “golden years”.

For plan sponsors, there are a few barriers to setting up these plans (both real and perceived). The additional onus on payroll or HR staff to administer payroll deductions is one. The other is a fear of matching or contributing to employees’ savings and having the employee leave in a short period of time.

To some plan sponsors, that investment in employees’ financial security is lost to the organization when the member leaves within a short time.

Employers are increasingly looking at introducing Deferred Profit Sharing Plans (DPSPs) as a way of retaining staff.

Why use a DPSP?

1) Employer Flexibility: If there are no profits, the employer does not have to contribute to the plan. Employee contributions are directed to the RRSP or TFSA, which can continue regardless of the company’s financial position.

2) Vesting: With RRSPs and TFSAs, employer contributions “belong” to the employee right away. But with DPSPs, the employer contribution amount can be returned if the employee leaves the organization prior to a set period of time up to two years. The advantage of this approach is that employers can use their contribution to a savings plan as an attraction tool, but if the employment arrangement doesn’t work out, the company’s contributions are returned to the organization.

3) Two Distinct Pools of Money: Part of your investment in employee benefits of all kinds is reminding employees what a great workplace you offer so that qualified staff continue to help you thrive. The final reason we like the idea of company contributions being directed to an RRSP and employee contributions being directed to a DPSP is that employees can see two distinct pools of money and can easily distinguish between their own savings and the money that you have set aside for their retirement.

4) Tax efficiency: Payroll taxes can increase the cost of salary increases. Because DPSPs do not attract payroll taxes, the cost to the employer is reduced.

Consider the following example*

* Assumptions:

- Group of 15 employees and payroll of $600,000

- Marginal tax rate of employees: 30%

- Payroll taxes for the employer: 12%

- Tax rates vary depending on province or territory.

Interested in how a DPSP can help support your benefits offering? Please contact us for assistance. We look forward to hearing from you.


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