Questions and answers
- Minimum Accrual under a DB provision
- Refund of employer contributions made in error
- Deeming of compensation under a DPSP or group RRSP
- PARs
- Same-Sex Benefits
- Seamless Pension Plans
- Quebec's Bill 102
- Flex Plans
- Administrative Issues
- Issues affecting Designated Plans
- Equal and periodic
- Demutualization
- Pensionable Service
- Maximum Pension Rule
- Maximum 2% Accrual Rate
- Proportionality Newsletter Issues
- Application of Maximum Pension Rule - Earnings from a non-participating Employer
- Custodial Agreements
Question 1 - Minimum Accrual under a DB provision
Paragraph 8506(2)(a) of the Income Tax Act requires that employer contributions to a money purchase plan must be based on a contribution formula that is acceptable. Paragraph 10 of Newsletter 91-4R imposes a requirement that the employer must contribute at least 1% of the total pensionable earnings of active plan members each year.
Is there a similar rule or policy which requires a minimum accrual in respect of a defined benefit provision?
Answer 1
The Income Tax Act does not establish an explicit minimum accrual rate for a defined benefit provision. It should be noted, however, that each plan must meet the primary purpose test in Regulation 8502(a).
Pension plans which are designed with accrual rates so low as to have no or minimal pension adjustments, do not pass the test. Their primary purpose is not to provide a reasonable retirement income that relates to the member's service as an employee.
It is this failure to meet the primary purpose test, and our ability to impose reasonable conditions under subsection 147.1(5) of the Income Tax Act, which provide our authority to refuse to register such arrangements.
At present, we continue to examine the cases on hand with a view to taking a position on a case by case basis.
Question 2 - Refund of employer contributions made in error
Often, an employer may contribute to a defined benefit plan based on an existing valuation report, while a new valuation is being prepared. When this new valuation is finalized, typically six or more months after its effective date, the employer may realize that it has contributed more than what the provincial rules required to fund the plan, as the new valuation discloses an improved funding status for the plan.
If the employer were to apply to the provincial regulator for a refund, would such a refund be a permissible distribution under the Income Tax Act?
Answer 2
Regulation 8502(d) defines all of the permissible distributions which a plan may pay out. As noted, the refund to the employer contemplated in this scenario is not a permissible distribution, as it is not being made to avoid the revocation of plan registration.
Therefore, such a payment would render the plan revocable. Administratively, the Registered Plan Division may, where the facts warrant it, decide not to revoke the plan registration for making such a payment. It is imperative, however, that the plan administrator must not allow for such a refund without first obtaining our written approval to make such a payment.
Question 3 - Deeming of compensation under a DPSP or group RRSP
A registered pension plan may prescribe compensation in order to allow an employer to provide ongoing accrual of benefits for a member on long-term disability. At present, it is not possible to prescribe compensation under a DPSP or a group RRSP for such a period.
Is consideration being given to extending the concept of prescribed compensation to DPSPs and group RRSPs?
Answer 3
This proposal, to extend the prescribed compensation rules to cover DPSPs and group RRSPs, has been previously considered, and rejected, by the Department of Finance.
The prescribed compensation rules for pension plans are needed to allow plans to meet provincial regulations governing maternity leaves, workers compensation leaves, etc. DPSPs and RRSPs are not governed by such provincial rules. It is unlikely that there would be significant enough demand to warrant extending these rules beyond pension plans.
Also, it should be noted that the concept of creating prescribed compensation for RRSPs would necessitate new reporting requirements for employers, and such a system would be costly to create and administer.
Question 4 - PARs
What are the PAR and transfer implications when the application of Ontario's grow-in rule results in an additional value being paid after the basic benefit has been transferred from the plan?
Answer 4a
We spoke with the Financial Services Commission of Ontario (FSCO) and they confirmed that this scenario can occur in two different situations.
Under the first scenario, the employer could be terminating a group of employees over a specified period of time (downsizing). FSCO confirmed that the employer will have to use grow-in when valuing the benefits, however, they can wait until the process is finalized. Under these circumstances, the employer is aware that the individual is still entitled to benefits from the plan.
Under the second scenario, FSCO indicated that there are rare cases where they have determined that there was a partial termination following the original transfer, and as a result, grow-in must now be used to provide an increased value of the individual's benefit that was previously transferred. FSCO did indicate that these cases are few and far between as most employers are aware of their rule.
In order to have a PAR determined for an individual, they must cease to be a "member" as defined in subsection 8300(1) of the Regulations. An individual will not cease to be a member as long as they remain entitled to a benefit under the provision.
Based on this, we can conclude that under scenario one, the individual could still be considered to be a member as there remains an entitlement to a benefit from the plan after the original transfer is made. This would result in the PAR not being reported until the value associated with the grow-in is paid.
Under this scenario, as the additional benefits are not paid as a result of an allocation of actuarial surplus, they would not be permissible under subsection 8501(7) of the Regulations. If a benefit is not paid in accordance with this subsection, subsection 8517(3.1) can not be used to determine the prescribed amount for transfer. The end result is that these additional benefits will not qualify for transfer by themselves.
As a result of the above, we strongly recommend that when an employer knows that grow-in will have to be used, they ensure that this is paid at the same time as the basic entitlement. This will ensure accurate PAR reporting and possibly permit the additional amounts to be transferred.
In the second scenario, a PAR would have been reported after the first transfer as the administrator was not aware that any benefit remained with respect to the individual. It can be argued that the member was always entitled to the grow-in benefit and therefore never ceased to be a member which would mean that the PAR was reported incorrectly.
We have received advice from FSCO that these situations are rare. However, based on feedback from the Consultation Session, there would appear to be sufficient cases to give this issue further consideration. If these situations arise, the plan administrator should write to us with supporting documentation so we can determine the most appropriate course of action. As this situation may not appear to be adequately dealt with under the current framework of the legislation, we will be in contact with the Department of Finance and FSCO to develop a solution.
b) How is PAR reported when benefits from one plan are offset by those in the plan of another employer?
Answer 4b
This situation is addressed on page 12 of the PAR Guide.
When benefits provided to an individual under a defined benefit provision depend on the benefits being provided under another defined benefit provision, subsection 8300(11) of the Regulations state that the individual will not be considered to be terminated from either provision until he is terminated from both. As a result, no PARs will be reported until the member terminates from both provisions.
Once PARs are to be reported, a PAR is to be determined under each provision. When doing this calculation, any benefits provided or amounts paid to the individual under one of the provisions are also considered to be a benefit or an amount paid from the other provision. This means that specified distributions from one provision are also deemed to be specified distributions from the other provision. As a result, when plans are designed in this manner, there must be some sharing of information between the two employers. In this regard, subsection 8406(4) will require the other employer to provide this information once a written request is made.
It is worth noting that we do have discretion to approve an alternate method of determining a PAR. If the application of the rules produces a PAR lower than that which would have been reported had there only been one provision, you can write to us.
Question 5 - Same-Sex Benefits
Please update the current status of the issues surrounding same-sex benefits. This should cover issues such as transfers, RRSPs, marriage breakdown and amendments to RPPs.
Answer 5
The Rosenberg decision only changes the definition of spouse in the Income Tax Act insofar as the definition affects the registration of pension plans.
As the Regulations governing the provision of survivor benefits and benefits paid on marriage breakdown are conditions applicable to registered pension plans, the Rosenberg decision allows same-sex to be read into the definition of spouse for these purposes.
Until the Act is amended, same-sex can not be read into the definition of spouse when it is used in other areas of the Act. This means that transfers to RRSPs (under either 147.3(5) or (7)) for same-sex spouses is not acceptable. Same-sex can also not be read into the definition of spouse as it relates generally to RRSPs or to DPSPs.
Even with the direction of recent court decisions, The Canada Customs and Revenue Agency does not have the authority to expand on the definition of spouse. This fact was reinforced by the Federal Court of Appeal's decision in the first CUPE challenge of Revenue Canada's refusal to register a pension plan that provided for same-sex survivor benefits. The Court dismissed CUPE's appeal on the grounds that the Minister of Revenue did not have the authority to interpret the provisions of the Charter.
Until there is legislated change, CCRA's position as stated above can not change.
Question 6 - Seamless Pension Plans
If a single plan is submitted that contains both an RPP and a SERP, will RPD register the RPP portion if the province is asked to register the combined plan?
Answer 6
One of the key features of recent RPP/SERP plans that we have received requires the provincial authority to register a plan that is different than the plan we register. They are being asked to register the combined document while we are asked to register only the RPP component.
We will not register this arrangement as subparagraph 147.1(2)(a)(iii) of the Income Tax Act states that "...the Minister shall not register a pension plan unless...where the plan is required to be registered under the Pension Benefits Standards Act, 1985 or a similar law of a province, application for such registration has been made"
For purposes of subsection 147.1(2), reference to "the plan" can only mean a plan that can meet the registration rules as set out in the Income Tax Act. This is supported by the fact that "the plan" must comply with prescribed conditions.
It is our position that, in these cases, an application for registration of "the plan" with the province was not made. The plan being submitted to the province for registration would not meet our prescribed conditions for registration and is therefore a different "plan" than what we are being asked to register. For this reason, we are of the opinion that the condition in subparagraph 147.1(2)(a)(iii) is not met under this proposal.
In support of this position, it is worth looking at how the ITA deals with the fact that "the plan" must be registered under both the ITA and provincial law. The ITA makes certain concessions that will allow benefits or funding in excess of what the ITA would normally permit if the law of a province requires "the plan" to provide those benefits or funding.
The most obvious example of this are the additional benefits that may be provided if a member funds for more than half of their own benefits. Because these additional benefits can be over and above what could otherwise be provided under a registered pension plan, the ITA imposes a member contribution cap that will limit the likelihood of an individual funding more than half their benefits and therefore limiting the chances that they will receive additional benefits from the plan.
It only makes sense that the plan being submitted to the province must be the same plan with the same provisions as the plan we are registering under the ITA. If this were not the case, the effect of the member contribution cap could be diminished.
Question 7 - Quebec's Bill 102
How is RPD responding to Quebec's Bill 102? It is our understanding that the maximum temporary pension of 40% of YMPE is not subject to paragraphs 8503(2)(b) or (l) of the Regulations. Will subsections 8504(5) and 8509(7) apply to the Bill 102 bridge? Will there be legislated change to the ITA to accommodate Bill 102?
Answer 7
Quebec's Bill 102 amended The Supplemental Pension Plans Act (SPPA) in order to provide two new types of benefits.
Section 99.1 allows for the payment of a temporary pension, or bridge benefit, in an amount up to 40% of the YMPE. This payment can replace all or a portion of Lifetime Retirement Benefits (LRBs) and will be done on an actuarially equivalent basis.
As this payment could exceed the amount permitted by the ITA, Finance is proposing amendments to the Regulations. Until the Regulations are amended, the RPD will not require amendments to comply with paragraphs 8503(2)(b) or (l) if it is clear that the benefit is subject to the SPPA and it is being paid in accordance with the limits and requirements of that Act.
It is also worth noting that because this benefit is paid on an actuarial equivalent basis in lieu of LRBs, paragraph 8504(11)(b) of the Regulations will exempt this payment from subsection 8504(5).
Section 69.1 allows a member to receive an early benefit during phased-in retirement to compensate for a reduction in remuneration. This benefit is paid in a lump sum at the request of the member.
As these amounts are not paid on a periodic basis, it has been determined that this early benefit is not a retirement benefit as defined under subsection 8500(1) of the Regulations but rather, a partial commutation under paragraph 8503(2)(m). As Quebec's legislation requires the assumption that the member's benefit will commence at NRA, neither the written word or the intent of paragraph 8503(3)(b) is violated and as a result, the Act does not need any amendments to accommodate such a payment.
Question 8 - Flex Plans
a) If contributions are made to a flex plan and the flex element is later refused by the province for registration, can those member contributions be returned or would this violate condition number 3 of the Flex Plan Newsletter?
Answer 8a
If contributions are being returned under these circumstances, we can confirm that the OACs can be refunded in accordance with subparagraph 8502(d)(iii).
We will require a plan amendment removing the flex element from it's inception and a letter from the province indicating their refusal to register the flex component of the plan.
b) Is there anything else new with Flex Plans?
Answer 8b
We are currently working on two revisions to the Flex Plan Newsletter:
- We are working on an amendment to condition number 3 of the Newsletter. This change will state that an amount paid outside of the plan will not be considered to violate the condition if the payment is done in accordance with an agreement that obligates the employer to compensate a member when their OACs exceed their OABs.
- We are also working on a change that will address how shared funding of OABs can be accommodated under a flex arrangement. The Newsletter is currently silent on the issue of employer shared funding so this change will detail what will be required should an employer wish to also contribute towards OABs.
Question 9 - Administrative Issues
(a) When, due to circumstances associated with the purchase of a company, the new employer can not meet the requirements of 147.1(2) of the Act (effective date of registration), what flexibility will CCRA provide with respect to an effective date prior to the year of application?
Answer 9a
- Subsection 147.1(2) of the Act requires that plans submitted for registration after 1991 will be registered effective from the later of
(i) January 1 of the calendar year in which application for registration is made in prescribed manner by the plan administrator, and
(ii) the day the plan began.
- RPD will consider, on a case-by-case basis, requests for effective dates prior to the calendar year in which a complete application is submitted
- the plan administrator must write to this office to explain the circumstances which have resulted in the delay in providing this office with the necessary documents on a timely basis. They must also certify that Pension Adjustments have been reported for all years
- RPD will then consider the request based on such issues as to whether there is continuity of coverage for the plan members stemming from the buy/sell agreement, is there a transfer of assets between plans, as well as the reasons that led to the delay in submitting an application for registration by the plan administrator
- buy/sell agreements tend to be the circumstances in which we are more flexible on the provisions of paragraph 147.1(2)(c )
(b) Why must a plan be amended to comply with the Income Tax Act and Regulations when the plan is being terminated?
Answer 9b
- one of the requirements of the ITAR is that benefits be paid in accordance with the plan as registered. As such, we must be certain that the plan terms are in compliance with the ITAR. Otherwise, a member may have a claim to benefits that would not be permissible.
- while this is generally the position that we have taken, we will deal with the requirement for amendments in exceptional cases on a case-by-case basis. For example, if a terminating IPP requires only a change to the early retirement provision and the sole member of the plan is 63 years of age, we may not insist on the amendment.
c) Why are we being asked to amend plans on more than one occasion with respect to the same submission?
Answer 9c
- Generally, an officer will review a submission and, if appropriate, request changes for compliance with our requirements. If the submission is amended as requested, the officer should be in a position to approve it and no further changes should be necessary. If the subsequent submission includes changes that were not requested, a further review would be necessary and another request for changes may be made.
- On occasion, after requested changes have been made, an officer may notice the need for a change that had been previously missed due to an oversight. It is incumbent on us in our responsibilities of enforcing the Income Tax Act and Regulations to request additional changes as appropriate. We regret any inconvenience this may cause. In the meantime, we are continually endeavoring to improve our services to our clients. As such, we have instituted an extensive training program within the Division that we anticipate will improve in consistency and accuracy in application of the law.
- While reviewing large documents (e.g. plan texts), we will periodically come across a submission that we find early in our review is clearly outside the requirements of the legislation. In such a case (three and out), the officer may stop their review, identify some of the provisions that fail to meet the requirements and ask that a re-written text be submitted in compliance with the legislation. Upon receipt of the re-written text, a further review would be undertaken and additional amendments may be requested.
Question 10 - Issues affecting Designated Plans
What is the status of issues that are under review with the Registered Plans Division and that generally affect certain designated plans?
(a) Sponsor (name) changes
Answer 10a
- this issue relates to pension plans that undergo a name change that reflects a change in corporate identity and that provides benefits with respect to pre-system service on behalf of a connected person
- under the administrative rules of the CCRA, a defined benefit plan can not provide pre-1990 benefits that are primarily for the benefit of connected persons (with the exception of 1968 or 1980 shareholder plans). In order to provide pre-1990 benefits, a 50/50 demonstration has to be provided
- the Division recently took the position that we will be accepting so-called "name change" plans without the requirement for meeting the 50/50 rule for pre-1990 benefits provided the benefits accrued with the former employer are not increased or changed. It will have to be clear from the plan wording that this condition will be met
- if the prior benefits are increased or changed, the 50/50 rule for pre-1990 benefits must be met
- we have begun to review those plans that were being held pending the outcome of our review of the issue. Of course those plans that have been held for purposes of another issue on hold (e.g. TIPPs) will be reviewed once that issue is resolved
(b) TIPPS (plans with reduced future benefits, plans with benefits less than 2%)
Answer 10b
- the Division has concerns with plans that are designed in such a way that they provide a maximum benefit on retirement, but minimize PAs in a manner that is not appropriate for such a benefit
- at present, we are actively reviewing this issue in conjunction with the Department of Finance. Once a decision has been finalized, we will proceed accordingly.
Question 11 - Equal and periodic
Can a retiree receive catch-up payments with reasonable interest out of the registered pension plan fund?
Answer 11
This question is one which relates more to the administration of a plan rather than the rules requiring payment of pension on an equal and periodic basis. While there is no provision in the regulations which allows catch-up payments or interest to be payable on catch-up pension payments, we understand that sometimes, timing problems do occur. This can happen, for example, upon the start-up of an annuity for a newly retired member. In such cases, the plan sponsor should contact us concerning payments to be made from the plan.
If there are instances where pension payments have not commenced before the end of the year in which a retired member reaches age 69, the plan sponsor must request, in writing, a waiver from the Agency under paragraph 8502(e) of the Income Tax Regulations. As part of this request, the sponsor should provide:
- the name and registration number of the pension plan,
- the retiree's name, age and postal address,
- the reason for the payment delay,
- the amount of the payment (and interest if any), and,
- any other specifics surrounding the case.
Question 12 - Demutualization
How will the impact of Demutualization on registered pension plans be addressed?
Will there be communication on the issue, relative to the Registered Plans Division's mandate?
Answer 12
Some insurance companies are currently in the process of demutualization as a result of changes to the Federal Insurance Companies Act and a similar piece of legislation in Quebec.
Demutualization is the process of converting a mutual company to a share company. Where a mutual company is owned by its voting policyholders, a share company is owned by its shareholders. Through the process of Demutualization, eligible policyholders will receive shares in the company, or cash, in exchange for the value of their ownership rights in the company. A number of these eligible policyholders are employers who hold group annuity contracts, an insurance product which is often used to provide retirement benefits under the terms of a registered pension plan.
Demutualization may impact on several issues affecting registered pension plans including:
- Benefit payments to annuitants,
- Alteration of individual annuity contracts for terminated members,
- Cash distribution to pension plan members and employers,
- Ownership (trust implications),
- Administration of demutualization payments,
- Investment gains and the impact on assets, the actuarial valuation report balance sheet, emergence of surplus (or excess surplus), with related effects on employer contributions and plan amendments to improve benefits.
The list may go on...
The main issues for Registered Plans Division seem to relate to the entitlement to Demutualization payments between employers and members (or annuitants) of registered pension plans and the impact on funding, actuarial surplus and its ownership. Some questions may require an in-depth analysis of the plan text and trust agreement.
The Division will publish information on this subject as soon as it becomes available, either through the Newsletter approach or in combination with the 'Commonly asked Questions and Answers' portion of our Internet Website. Please contact us if you have any specific questions concerning Demutualization and its impact on registered plans.
Question 13 - Pensionable Service
What are the factors that determine when a full year of service is accrued under a defined benefit provision of a pension plan?
Answer 13
The plan document should state how pensionable service is credited under a pension plan. Specifically, it should deal with accruals for purposes of pensionable service on a full-time and part-time basis.
Often, the nature of an industry will drive the way in which full-time service is accrued under the terms of a pension plan. For example, if an industry sector (such as a trade) has a four day work week, this could be considered a full-time accrual of pensionable service. Conversely, if an industry sector has a 5 day work week, and an individual works four days a week, eighty percent of a full year would be accrued over a calendar year.
Where pensionable service is based on hours worked with an employer, and a set number of hours is used to determine whether a year of pensionable service has been accrued, this full-time number of hours must be reasonable given the circumstances.
We would not accept 1 day a week or 1 day a month as being a full-time accrual of pensionable service.
Question 14 - Maximum Pension Rule
Does the maximum pension rule apply at termination of employment or commencement of pension benefits?
Answer 14
The Income Tax Regulations [subsection 8504(1)] stipulate that the maximum pension rule applies at the time when pension benefits commence to be paid.
There are situations where the amount of pension would not change between the time a person terminates employment and the time when the benefits commence to be paid, for example, under the terms of a non-indexed deferred annuity. Conversely, there are situations where the pension amounts could change between those times. In some cases, a plan amendment could alter the amount of benefits payable during a deferral period.
The terms of the pension plan describe the pension benefits which are payable to participating members. In this regard, the plan administrator must look to the registered terms of the plan when determining the maximum pension benefits to be paid to a member at any given time. It is for this reason that the plan terms must be clear and in compliance with the regulations, so that benefits to a member will not exceed the maximum pension payable for the calendar year of benefit commencement.
If you have a particular case which you feel would not require an amendment, for the plan to be in full compliance with the maximum pension rules, please contact us to discuss the specifics.
Question 15 - Maximum 2% Accrual Rate
Can a defined benefit pension plan provide for a series of marginal rates which under most salary ranges and circumstances produce a benefit accrual rate that is less than 2%.
Example: Employee contributions:
7.3% of salary below the YBE
5.5% between the YBE and YMPE
7.3% above the YMPE
Benefit Rate :
30% of contributions
Contributions are limited to 6.67% of salary
Some salary ranges will produce an "equivalent benefit accrual rate" in excess 2%
Salary range above the YMPE : 30% of 7.3% = 2.19%
YBE = Year's Basic Exemption ($3,500)
YMPE = Year's Maximum Pensionable Earnings
Answer 15
As in this example, where the Employee contribution rate has a bearing on the annual defined benefit accrual rate, despite the fact that the annual accrual is limited to 2%, we would not accept such a benefit rate. If the plan text is ambiguous or uses the employee contributions as the basis for determining the benefit accrual rate (30% x 7.3%) and the equivalent benefit accrual rate exceeds 2%, we do ask for amendments. Where there is more than one contribution rate, then each equivalent benefit accrual rate can not exceed 2%.
Similarly, in cases where the benefit accrual rate is based on earnings and there is more than one benefit accrual rate, then each benefit accrual rate cannot exceed 2%. For example, a plan formula of 1% of earnings up to YMPE plus 2.2% of earnings above YMPE would not be acceptable even if the benefit was capped at 2% of earnings.
The reason we ask for amendments is to ensure compliance with Regulation 8503(3)(g) and reduce any ambiguity in the benefit accrual formula used in pension plans. This measure ensures that there is some degree of clarity between the employee contribution rate, the benefit accrual rate and their interaction with the maximum pension rules of 8504. Our primary concern is keeping the plan terms understandable for members and administrators with regards to the limits.
Question 16 - Proportionality Newsletter Issues
Concerns have been raised over the application of the proportionality condition of Newsletter 99-1. We will clarify for you the application of the Newsletter and our revised administrative position for the following issues:
a) Retroactively of the new rules
Answer 16a
We will provide relief to situations where the plan terms were submitted to us before
March 31, 1999 and provide equal benefits for pre-1990 and post 1989 service in order to exempt them from having to meet the present value test of the Newsletter 99-1.
We will also provide relief to situations where plan terms were submitted before May 15, 1998 but have not yet been accepted for registration and the plan cannot be amended to meet the prescribed conditions for registration without being considered a new submission, subject to the proportionality condition of 99-1.
b) Funding of lifetime retirement benefits
Answer 16b
Lifetime retirement benefits that are accepted may be funded without additional restrictions as provided through an acceptable funding media (8502 (g) of the ITA). If the plan is a Designated Plan it would also be subject to the special rules for Designated Plans under 8515.
c) Authority for imposing the conditions
Answer 16c
The authority for imposing the conditions is found under 8503(3)(e), which states that pre-1991 benefits must be acceptable to the Minister. Regulation 8503(3)(e) also expresses the additional condition concerning connected persons and clarifies what is clearly unacceptable. Newsletter 99-1 clarifies situations that are acceptable to the Minister and is by no means exhaustive.
d) Past service only plans
Answer 16d
Other than the changes stated above, plans that provide for pre-1990 pension benefits must meet the requirements of the Newsletter 99-1 (the proportionality Newsletter). The proportionality condition in the Newsletter generally requires that the value of the pre-1990 LRBs does not exceed the value of post-1989 LRBs accrued on a current-service basis. The condition generally does not apply to certain larger plans or plans that are not primarily for the benefit of key employees if we have waived the application of the condition. Past service only plans that do not provide for pre-1990 service would be acceptable. We will accept a terminally funded plan that provides post-1989 benefits only. A terminally funded plan that provides for pre -1990 benefits will have to meet the requirements of the Newsletter.
Question 17 - Application of Maximum Pension Rule - Earnings from a non-participating Employer
Can a pension plan use the earnings from a non-participating employer, whether a foreign, predecessor or successor employer, for purposes of calculating the highest average compensation in the maximum pension formula of 8504?
Answer 17
Regulation 8504 (2) requires the maximum calculation to be based on earnings from an "employer who participated under the provision". Earnings with a successor employer who does not participate in the provision cannot normally be recognized.
The Foreign Service Newsletter 93-2 also provides for foreign service to be recognized under a number of circumstances where in essence there is a participating employer who recognizes the service and files the appropriate PA for the employee in question.
The request to recognize earnings from a predecessor employer where there is a purchase and sale agreement seems reasonable to the Canada Customs and Revenue Agency and we will be discussing the possibility of changes to the ITA to accommodate this situation with the Department of Finance.
Question 18 - Custodial Agreements
Will the Canada Customs and Revenue Agency recognize simple custodial agreements as an acceptable funding media for purposes of 8502(g)?
Answer 18
Trust agreements that are written as simple custodial agreements are acceptable funding media for purposes of 8502(g) as long as the trustee is clearly identified and the agreement is binding between the trustee and the plan administrator.
Following the prepared Question and Answers, some additional questions were raised as follows.
A participant asked if plan amendments were required as a result of the status change from Revenue Canada to agency. The Chief of PSS referred to Newsletter 99-2 released on November 12, 1999 by indicating that no changes were necessary as the legislation allows for the transfer of the term Revenue Canada to CCRA; however, any new submissions should make reference to CCRA.
With respect to Question 2, (Refund of employer contributions made in error) a participant talked about a situation where an employer is funding the plan based on the valuation report and, as a result of the funding, the plan is in an excess surplus position. Must the entire amount of contributions made be refunded or only the portion which exceeds the amount beyond the acceptable cushion. The Chief of Audit replied that a refund would only be required on the amount exceeding the acceptable cushion. As a follow-up, a participant asked what would happen if an employer contributed the wrong amount (i.e. not the amount based in the evaluation). The Chief of CSS indicated that each case must be evaluated on its own merit (i.e. all facts of the case must be considered).
Clarification was requested with regard to pension payments that have not commenced before the end of the year in which a member reaches age 69. The Chief of AAS indicated that a plan sponsor must request a waiver from age 69; the request must include the name of the retiree, the reason for the payment delay, the amount of the payment delay including interest as well as other factors specific to the case.
Some participants questioned RPD's refusal to register seamless pension plans. The Chief of TSS indicated that RPD is of the opinion that a possible motivation of such plan designs is to use the registered vehicle, through surplus, to provide benefits in excess of the ITA maximums. This, along with the technical issues described in question 6, are the reasons RPD is giving further consideration to these plan designs. It was suggested that written enquiries be presented to RPD for further consideration.
With regards to question 4, a participant elaborated on a problem she is facing with PAR reporting in relation to the application of additional benefits resulting from Ontario's growing-in rule. Ontario's legislation states that growing-in benefits are only payable once the Superintendent has declared the partial wind-up of the plan; however, the provincial legislation does not clearly define what constitutes a partial wind-up and employers do not always voluntarily declare them. As a result, it is quite difficult to report PAR. The Chief of TSS indicated that the issue would be raised with the Department of Finance.
