As we continue our exploration of employee retirement saving, we’re taking a deep dive into Deferred Profit Sharing Plans, more commonly called DPSPs.
The DPSP is a powerful tool, it helps employers attract and retain top talent. Many employees and perspective recruits consider a DPSP offering as a reward, wherein the employer shares a portion of their yearly profit with the employees who helped them achieve it.
Yet, just like the well-known RRSP, while many of us have heard the term DPSP bandied about, we may only have the vaguest idea of what it is. It’s hard to plan for retirement when we don’t fully understand the options available to us, including those offered by our employers.
The fact is, a DPSP offering is one of the best benefits an employee can receive, yet most don’t know why.
So, let’s take a deeper dive into the DPSP.
What Exactly is a DPSP?
A DPSP is a type of Canadian pension fund that helps employees save for retirement. It is an employer-sponsored profit sharing plan, which means businesses share their profits with employees.
A DPSP is registered with the CRA and can only receive contributions from the employer.
How do DPSPs Work?
At year end, if your company declares a profit, they then share a portion of that profit with employees, distributing a fixed amount of money into their DPSPs.
Contributions employers (the plan sponsor) make to DPSPs are tax deductible for them, and tax deferred for employees (the plan trustees).
What’s the Benefit of a DPSP?
DPSPs benefit both the employer and employee, each in unique ways.
For the employer, a DPSP plan can generate significant savings and includes benefits such as:
- It’s cost effective
- Enables employers to set up a vesting period of upwards to two years—meaning if a participating employee leaves the company during this period, any accumulated contributions are returned to the employer
- All DPSP contributions are paid out of pre-tax business income
- All DPSP contributions are tax deductible
- DPSPs incentivize talent—helping employers bring in and keep the best employees
Likewise, for employees, the DPSP offers many benefits, helping employees save for retirement, as well as:
- Employer contributions are tax-sheltered and non-taxable
- In certain cases, accrued funds can be withdrawn prior to retirement, it depends on the vesting schedule
- If an employee leaves the company after the vesting period they can withdraw the funds that have accumulated, or they can transfer the funds (tax-free) to another DPSP, an RRSP or an RPP.
There are certain limitations to the DPSP that participating employees need to be aware of.
- Only the employer can make contributions to the DPSP—employees cannot add to it
- Employers can’t make any spousal contributions to the DPSP
- Employers are limited to how much of a contribution they can make per year to each employee’s DPSP. Currently the max contribution is 50% of the maximum RRSP limit
The Group RRSP / DPSP Combo
DPSPs are often offered in conjunction with other retirement plan options. One of the most popular pairings is the RRSP-DPSP plan. This kind of plan has employees make financial contributions through a group RRSP while the employer contributes through the DPSP.
Regardless of how your business offers a DPSP, the fact is, it’s a worthwhile savings plan that rewards employees and helps them save for their future.