Understanding PRPPs

In 2012, the federal government’s Pooled Registered Pension Plans Act was signed into law. The plan’s objective is to create a large-scale, inexpensive pension plan for employees of companies that don’t already offer a pension.

But the federal government had to collaborate with the provinces to create the new pensions. After a slow start, PRPPs are well on their way. Alberta and Saskatchewan have also adopted the PRPP (although at time of writing, legislation in both provinces isn’t yet in effect). B.C. tabled legislation on February 19, and Ontario’s promised to do the same in the fall.

B.C., Alberta and Saskatchewan have essentially cloned the federal legislation.

The basics

For PRPPs, the employer isn’t required to contribute to the plan on behalf of employees. The employer’s required to notify employees in writing of its intention to set up a plan, and employees will be able to opt out within 60 days of implementation. They also have the opportunity, once the employer’s established the plan, to set contribution levels to 0%.

Details include:

• Participants cannot use plan proceeds as collateral for a loan.
• Proceeds are creditor protected in case of bankruptcy or insolvency.
• PRPP assets are subject to division in the event of divorce or separation.

If the participant dies, his or her spouse or heirs (if there’s no spouse) gets a benefit equal to the participant’s account balance. Participants can also designate beneficiaries.

PRPPs will offer investment options of varying degrees of risk, as well as a default option.

Employer obligations

Outside of Quebec, employers have discretion on whether they choose to set up PRPPs. Legislation also doesn’t enforce a mandatory contribution level; it’s left to plan administrators.

All PRPP assets are locked in, and in case of termination of employment, are only transferable to other locked-in registered savings (such as another PRPP, LIRA, RPP).

PRPPs vs. group RRSPs

For employers who contribute to a PRPP, there’ll be a tax advantage over group RRSPs. The advantage has to do with source deductions and payroll taxes. Employers don’t actually contribute to group RRSPs, but rather provide a salary top-up contributed on the employee’s behalf. There are additional payroll taxes on the top-up (CPP/QPP, EI, etc.). With PRPPs, if the employer contributes, it doesn’t have to make payroll contributions on that amount.

Further, employer PRPP contributions aren’t taxable income to the employee; instead, they create a pension adjustment (that will reduce future RRSP contribution room). With group RRSPs, the amount an employer designates as contributions is taxable income to the employee, but it also gives rise to an RRSP contribution receipt.