Did you know that almost 70 percent of Canadians now have an RRSP? Despite that, many Canadians still worry about when they’ll be able to retire. Offering a savings program as part of your employee benefits can help your team members get on the right track.
As noted, many Canadians have RRSPs, and they remain one of the most popular options for retirement savings. You do have other options, though. If you already have an RRSP program, you might not think you need to add anything else, but another look may be wise. A DPSP could help both you and your team members.
What Is a DPSP?
The acronym DPSP is short for “deferred profit-sharing plan.” With one, the company distributes profits to employees DPSP accounts. You’re allowed to make contributions regularly or irregularly, as you may not have a profit every year.
Only employers can make contributions to DPSP plans. That makes them quite different from the usual pension plan. It’s also different from other profit-sharing models, where employees get their cut of the profit right away. This can hurt employees, as their share of the profit could push them into a higher tax bracket. Government “clawback” then takes away the extra earnings.
Since the DPSP is deferred, employees aren’t charged tax on the amounts until the funds are withdrawn.
How Do DPSPs Compare to RRSPs?
DPSPs are similar to RRSPs in a couple of ways. First, they help your employees save for retirement. Second, both plans are tax-deferral schemes. As mentioned, that means your employees won’t pay tax on the contributions until they withdraw the funds.
Most people move into a lower tax bracket when they retire, which means DPSPs and RRSPs result in net tax savings for your team members. As a result, your team members are more likely to leave the funds to grow in the account.
As mentioned, DPSPs are 100% employer-funded. An RRSP, by contrast, can be either employee-funded or a joint effort between the employer and employee. That means you might match your employees’ contributions, or your employees may be the only ones contributing to an RRSP.
DPSPs are funded by your profits. At the end of the year, if you’ve recorded profit, you can make the decision to distribute that profit to the employees via the DPSP.
Finally, unlike RRSPs, DPSPs do not have the same contribution limits. This can help protect you and your employees against overcontribution penalties.
How Does a DPSP Help Employers?
If you offer an employer match to employees, then you may want to consider using the DPSP instead of contributing directly to employees’ RRSPs.
Using the DPSP lets you keep your funds if the employee leaves the company. If you use an RRSP-only structure, the employee can cash out the entire value of the account, including your contributions. You may not mind that if the employee has been with you for a couple of decades, but it what about employees who quickly move on? Depending on how the funds are invested, it could actually cost you more in administration fees, taxes, and so on.
Like the RRSP, employer-match contributions made through a DPSP are tax-deductible. Perhaps best of all, you can offer your employees both DPSP and RRSP options as part of their benefits, increasing the diversity of their portfolios and allowing them to save for retirement more effectively.
Employers who offer both RRSPs and DPSPs are usually in a better position to both attract and retain top talent in their fields.
Do You Have the Right Retirement Savings Structure for Your Team?
With so many Canadians worried about their ability to save for the future, there’s extra scrutiny on retirement savings plans. Whether you already offer one or you’re wondering how best to structure a new plan, it might be time to review your options.
Wondering which benefits you should offer to your team? Get in touch and discover the most in-demand benefits, as well as the best options for offering them!