How to start a registered retirement savings plan for your business
There are 3 popular options – Group RRSP, DPSP and group TFSA
The reasons to offer a group savings plan include help attracting and keeping employees, as well as tax advantages
There are options for businesses as small as 2 people
What group saving options are available for small-business owners?
There are 3 retirement saving options:
Group registered retirement savings plan (RRSP) – The business owner sponsors this plan which is a group of individual RRSPs. Contributions are deducted from employee salaries, pre-tax, through a group RRSP issuer (such as Canada Life).
Employees usually contribute 3 to 5% of earnings. While employer contributions aren’t mandatory, some employers choose to match 50 to 100% of employee contributions. These employer contributions are taxable as income to the employee.
Many employees see a group RRSP as a way to pay themselves first, before taxes and other deductibles to their pay.
Employers can choose to offer group RRSPs to management only, or to management and staff once they’ve been employed for a certain length of time.
Deferred profit-sharing plan (DPSP) – If you want employees to have a financial interest in your company’s well-being and performance, a DPSP is a good option.
With a DPSP, the employer distributes a portion of pre-tax profits to selected employees. Only employers may contribute to a DPSP, and the contribution made for each employee cann’t be more than the lesser of 9% of an employee's earnings or the limit set by the Canada Revenue Agency (CRA) yearly. Employers’ contributions are tax-deductible and not a taxable benefit to the employee.
Group tax-free savings account (TFSA) – This is an option for employees who may be saving for something more immediate than retirement. An employer can match employee contributions into a TFSA but the total amount that can be contributed is set each year by the CRA. The employer offers the plan and convenient payroll contribution.
Benefits of starting a group savings plan
- Employers can help employees plan for their future. Employees can use convenient automatic payroll contributions (before tax for RRSP contributions).
- Help keep and attract talent. Employees will see you care when you match their contributions.
- Both employer and employee contributions to an RRSP are tax deductible to the employee.
- DPSP contributions are tax deductible to the employer within certain limits, as defined by the Income Tax Act.
- Investment management fees for a group savings plans are generally lower than individual plans, giving your employees the opportunity to grow their savings faster.
When should you start a group savings plan for yourself and/or your employees?
There are plans available for companies as small as 2 employees.
Ultimately, you should start a group savings plan when you want to show your commitment to your employees’ financial future and well-being.
You may also decide that offering a group savings plan is something that can help set your business apart when it comes to attracting and keeping employees.
Now that you understand more about the options for offering a group savings plan, you may want to meet with an advisor to:
Determine which option best meets the needs of your business
Get a quote on providing a group savings plan for your employees