Understanding VRSPs

In 2012, the federal government’s Pooled Registered Pension Plans Act was signed into law. Quebec’s version, the Voluntary Retirement Saving Plans (VRSP), came into effect July 1, 2014.

Here’s what you need to know.

The basics

For VRSPs, 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.

Details include:

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

If a participant dies, his or her spouse or heirs (if there’s no spouse) gets a benefit equal to the participant’s account balance. Under certain conditions, participants in a VRSP will be able to designate beneficiaries.

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

Employer obligations

Any employer who has who meets the below requirements will have to subscribe to a VRSP, automatically enrolling all employees who are at least 18 years old with one year of continuous service:

• 20 or more employees on December 31, 2016;
• 10 or more employees on December 31, 2017; or
• 5 or more employees starting any time after January 1, 2018, with at least one year of continuous service.

Employer contributions are also locked-in, but employees’ aren’t. If the employee leaves the company, proceeds from plan contributions are transferable to another VRSP, but also into an RRSP.

In Quebec, employers that already offer group plans, including group TFSA, aren’t required to establish a VRSP. This is a great feature because it avoids a situation where employees contribute to a program that could lead to a Guaranteed Income Supplement (GIS) clawback.

VRSPs vs. group RRSPs

For employers who contribute to a VRSP, 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 VRSPs, if the employer contributes, it doesn’t have to make payroll contributions on that amount.

Further, employer VRSP 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.

Quebec’s experiment

10 providers have been authorized as VRSP administrators, most of them insurance companies. VRSP legislation requires plans be inexpensive.

Employers, however, have to carefully choose VRSP providers when establishing a plan. Fees for transfering from one administrator to another are high. For example, the transfer fee for a VRSP with 5 employees could be anywhere from $250 to $750, depending on administrator. To transfer a plan with 50 employees, the fee could be $500 to $3,750.

The most striking feature of the VRSP legislation is it provides employers an incentive to open group plans instead of VRSPs. Why? Most employers are reluctant to open an investment vehicle regulated by the government. Also, most clearly see the benefits a “full service” advisor can bring their employees. Thirdly, for smaller businesses where employees don’t earn high salaries, opening a group TFSA will be more beneficial because they’ll avoid potential Guaranteed Income Supplement (GIS) clawbacks in retirement.

Given that these plans aren’t mandatory outside of Quebec, it’s unlikely they’ll get much traction.