Defined Contribution Pension Plans, including Québec’s Simplified Pension Plans

In a Defined Contribution Pension Plan (DC), the employer and plan member contribute a set or defined amount on a regular basis. The amount of the eventual retirement income is not set in advance, since the amount of pension income that the member receives upon retirement is determined by, among other things, the amount of contributions accumulated and the investment income earned. In a DC, future benefits fluctuate on the basis of investment earnings.

Advantages for Employers

In a DC, contributions and administration fees are tax deductible for the employer. Since the employer is required to contribute, a DC demonstrates their involvement in the financial security of their employees and is seen as a highly attractive employee benefit.

Also, plan members are responsible for providing investment instructions and bear the risks related to their investment choices. As the employer no longer has any obligation on the account’s performance after the funds are deposited, these plans require little work and are low risk to the employer.

Advantages for Employees

In a DC, contributions are set in advance at a fixed amount or percentage of salary and are immediately earned (applicable in most provinces). Since plan members are responsible for choosing investment options, they have more flexibility and can align their choices with their retirement needs and goals.

In addition, plan members can receive an immediate tax refund on their employee contributions. In the event of personal bankruptcy or insolvency, the savings of plan members are protected from creditors.

Québec’s Simplified Pension Plans (QSPP)

A QSPP is a defined contribution registered pension plan. The contributions of plan members (if any) are made through payroll deduction and are subject to tax exemption. QSPP is a written contract by which an employer only or an employer and employees are required to make contributions in view of providing the employees with retirement income.

QSPP is offered and administered by financial institutions. It combines the advantages of a Defined Contribution Plan, a Group RRSP and a Deferred Profit-Sharing Plan and is designed to respond to the needs of smaller businesses.

Additional Advantages for Employers

Since a QSPP is a multi-employer plan, administrative costs are reduced. There are also fewer administrative and legal constraints, because the financial institution is the administrator.

Additional Advantages for Employees

In a QSPP, contributions are vested immediately. This means that plan members will not have to go through a waiting period to be entitled to the value of the contributions to the plan. Voluntary contributions may be withdrawn if the employer has given prior consent.

To learn more about Defined Contribution Pension Plans, including Québec’s Simplified Pension Plans, we invite you to reach out to us.