Choosing the right retirement plan for your employees is crucial for attracting top talent, encouraging long-term loyalty, and providing valuable financial security. Deferred Profit Sharing Plans (DPSPs) and Group Registered Retirement Savings Plans (RRSPs) are two popular options in Canada, each offering unique benefits to meet the diverse needs of your workforce. This guide breaks down the key differences, tax benefits, and scenarios for using these plans, focusing on their combined application for businesses.
DPSPs and RRSPs are retirement savings plans designed to help Canadian employees save for their future. While both plans offer significant tax benefits, they cater to different employer objectives and employee needs. DPSPs, typically funded solely by employers, and Group RRSPs, commonly funded by both parties, bring unique advantages when used together.
Increasingly, businesses adopt a combined RRSP/DPSP model, where employee contributions flow into the RRSP while employer contributions are allocated to the DPSP. This hybrid approach creates a comprehensive retirement package that supports tax efficiency, employee engagement, and retention.
Offering retirement savings plans is essential for improving employee morale, satisfaction, and retention. A recent Sun Life study reveals that companies offering retirement benefits have better success rates in retaining employees, particularly those over 40. A combined RRSP/DPSP plan offers both immediate benefits and long-term incentives, making it a compelling choice for employers aiming to stand out in competitive markets.
The following table summarizes the key features of DPSPs and RRSPs, as well as their complementary use in a combined plan:
| Feature | DPSP | RRSP | Combined RRSP/DPSP |
|---|---|---|---|
| Contribution Source | Employer only | Employer and employee | Employer contributions to DPSP; employee contributions to RRSP |
| Vesting Period | Yes, up to 2 years | Immediate | Vesting for employer contributions only |
| Contribution Limits | Lower than RRSP | Higher contribution caps | Maximized by using both plans |
| Tax Treatment | Tax-deductible for employer | Tax-deductible for employee and employer | Tax advantages for both employer and employee |
| Withdrawal Flexibility | Limited due to vesting | Immediate, flexible | Balanced access and retention incentives |
| Best Use Cases | Retention and engagement | Regular retirement savings plan | Comprehensive, flexible retirement strategy |
A Deferred Profit Sharing Plan (DPSP) allows employers to contribute to employees' retirement savings, typically based on company performance. Contributions are tax-deductible for employers and can be tied to a percentage of profits, but employers are not required to disclose profit reports to employees or the CRA.
Tax Deductibility: Contributions are tax-deductible for employers, reducing taxable income.
Profit-Based Contributions: Contributions can align with company performance without requiring detailed profit-sharing reports.
Retention Incentives: Vesting periods (up to two years) encourage employees to stay with the company longer.
DPSPs are ideal for businesses looking to supplement retirement savings and incentivize retention. They are often paired with Group RRSPs to create a balanced plan.
A Group Registered Retirement Savings Plan (RRSP) allows both employers and employees to contribute, offering tax-deductible benefits for both parties. Employee contributions are deducted from their taxable income, and employer contributions can enhance retirement savings, often through matching.
Immediate Vesting: Employees own their contributions and any employer match immediately, providing instant access.
Higher Contribution Limits: The CRA’s annual limit for RRSPs is generally higher than for DPSPs, supporting larger retirement savings.
Flexible Withdrawals: Employees can access their savings anytime, though withdrawals are subject to tax.
While Group RRSPs offer flexibility, they may lack the retention benefits of DPSPs due to the absence of vesting.
Most businesses now implement RRSP/DPSP hybrid plans, where employer contributions are directed to the DPSP while employee contributions go to the RRSP. This structure maximizes tax benefits and supports diverse employee needs.
Optimized Tax Benefits: Employer DPSP contributions are tax-deductible without affecting employees’ RRSP contribution room, providing maximum savings potential.
Retention Strategy: The DPSP’s vesting period promotes employee loyalty, while RRSP contributions offer immediate value.
Increased Savings: Employees benefit from higher combined contributions, supporting robust retirement savings.
Administrative Simplicity: Consolidating RRSP and DPSP contributions under a single plan structure simplifies administration while offering a comprehensive package.
Tax Benefits and Contribution Limits
DPSP: Contributions are limited to the lesser of 18% of an employee’s compensation or the CRA’s annual DPSP limit. These contributions do not reduce an employee’s personal RRSP room.
RRSP: Contributions are capped at 18% of the employee’s previous year’s income up to the CRA’s annual maximum, and they reduce personal RRSP room.
Combined Plan: Employer DPSP contributions and employee RRSP contributions maximize overall savings potential without overlapping limits.
Retention vs. Flexibility
DPSP: Vesting periods (up to two years) incentivize employee retention by delaying full access to employer contributions.
RRSP: Immediate access to savings fosters flexibility but may not support retention.
Combined Plan: Retention benefits from the DPSP complement the flexibility of the RRSP, meeting diverse employee needs.
Withdrawal Flexibility
DPSP: Restricted withdrawals align with long-term retirement goals.
RRSP: Immediate withdrawals offer flexibility, though funds withdrawn cannot be re-contributed.
Combined Plan: Balances short-term flexibility and long-term savings with strategic employer and employee contributions.
Choosing between a DPSP and an RRSP—or combining both—depends on your company’s goals and workforce needs. While DPSPs excel at encouraging retention through vesting, Group RRSPs provide flexibility and immediate benefits for employees. The RRSP/DPSP hybrid approach offers the best of both worlds, ensuring tax efficiency, employee satisfaction, and long-term savings.
By understanding the unique strengths of each plan, businesses can create a tailored retirement strategy that attracts top talent, fosters loyalty, and strengthens competitive advantage.