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Employee Benefits

Pension and Benefits: Why You Need Both an RRSP and DPSP

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Are you planning to offer a pension and benefits plan to your employees? There are many types of pension plans employers can offer, and choosing a plan is a big decision. Two common types of pension plans are registered retirement savings plans (RRSP) and deferred profit-sharing plans (DPSP).

Here’s what you need to know about these plans and their benefits for your business.

Basics of Registered Retirement Savings Plans

The registered retirement savings plan is a common component of pension and benefits plans. If you decide to offer a registered retirement savings plan, your employees’ contributions will be automatically deducted from their paycheques. Employees can decide how much they want to contribute—either a fixed amount or a percentage of their income—and it will automatically be added to the fund. Employers can also add funds to their employees’ RRSPs.

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Spousal accounts are allowed with these plans, so employees can use the plan to split their retirement income with their spouses. There are no restrictions on eligibility, so these plans are a good one-size-fits-all addition to your pension and benefits plan.

If you decide to contribute money to your employees’ plans, that money is theirs, even if they quit right away. There’s no way for companies to set up a vesting period or to get money back that they’ve already paid employees. This can be a worry for companies that have a lot of turnover.

Basics of Deferred Profit-Sharing Plans

Deferred profit-sharing plans differ from RRSPs in that only employers are allowed to contribute to them. Business owners can share their profits with some or all of their employees on their own schedules. You can contribute to the DPSP monthly, quarterly, or whenever you want to reward your employees by sharing your business’s profits with them. You can also pay your employees’ bonuses into a DPSP. The contributions you make to your employees’ DPSPs counts against their RRSP contribution room, so it’s important to monitor contribution limits.

Only employees can benefit from DPSPs, so you can’t make spousal contributions. There are restrictions as to who can benefit from DPSPs, and people who own 10 percent of your company—or their family members—aren’t allowed to participate. Businesses need to carefully monitor compliance to make sure only eligible employees are added to the plan.

Any contributions you make to the DPSP don’t vest immediately, and it can be as long as two years before employees are allowed access to the money. If they quit or get fired before that time, you get the money back. If you’re working with a limited compensation budget and need to manage the costs of your employee benefits, not spending money on short-term employees can provide a lot of relief.

Why You Need Both

The two types of plans have some similarities, but they also have enough differences that businesses can benefit from offering both. If you want to match your employees’ RRSP contributions, adding your matching funds to a DPSP can help protect your money. That way, if employees don’t stay with your company for long, you get to keep your contributions. Having a two-year vesting period also gives employees motivation to stay with your company long term, which can help increase retention and reduce turnover.

When employers contribute funds to a DPSP instead of an RRSP, employees benefit, too. This is because employer contributions to RRSPs are subject to the same deductions that salaries are subject to, like workers’ compensation, unemployment insurance, and CPP deductions. Employer contributions to DPSPs aren’t subject to any of these deductions, so employees get to keep more of the money.

Offering both types of plans makes your pension and benefits package more attractive to potential employees. Making RRSP contributions is a very generous benefit on its own, but when you make those contributions into a DPSP, employees get to enjoy a higher total compensation. This helps your business stand out from other companies that are only offering registered retirement savings plans.

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Margaret Reid

Margaret Reid

As the senior vice-president of Apri Insurance Services Inc., Margaret is a benefits consultant and manager of technical support. She has almost 40 years of experience in employee benefits as well as processing health and dental claims, benefits administration, and client service and groups sales. Margaret worked at Crown Life, a major insurance carrier, for 20 years, then worked at CG&B as the manager of their group department. She moved to B.Comm Financial Insurance Solutions in 2007, which merged with several other benefit consulting companies in 2011 to create Apri Insurance Services Inc. Margaret has unintentionally followed in her father’s footsteps. He was a group sales rep with Crown Life when she was a child and helped her get her first job in group insurance, which led to her current career path.

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