Group RRSPs and Deferred Profit Sharing Plans: A Business Owner's Guide to Employee Retirement Benefits

Group RRSPs and Deferred Profit Sharing Plans are common tools for attracting and retaining employees. Here is how they generally work, how they're taxed, and how they fit alongside an owner's own retirement strategy.

Why Small Businesses Consider a Group Retirement Plan

Offering a retirement savings benefit can help a small business attract and retain employees in a competitive labour market. Two structures come up most often: the Group RRSP and the Deferred Profit Sharing Plan, or DPSP. What follows is general financial-planning education for business owners weighing the idea, not a description of a plan set up or administered by DMPG, since establishing one involves a third-party plan provider along with your accountant or HR advisor.

How a Group RRSP Generally Works

In a Group RRSP, employees contribute to individual RRSP accounts through payroll deduction, often though not always alongside some level of employer matching. Contributions reduce the employee's taxable income in the same way an individual RRSP contribution would, subject to the employee's own available RRSP contribution room, and the plan is typically administered by a third-party provider the business selects.

How a DPSP Generally Works

A DPSP works differently. Only the employer contributes, sharing a portion of profits into each participating employee's account, employees cannot make direct contributions to it themselves. Employer contributions are generally tax-deductible to the business and are not taxed to the employee until withdrawn. DPSP contribution room is separate from, but factors into, an employee's overall RRSP room for the year, and many businesses pair a DPSP with a Group RRSP so employees have both an employer-funded account and a place for their own contributions.

• Employer matching is usually optional and set by the business, unlike a registered pension plan with fixed funding obligations
• Employees are generally taxed only when they eventually withdraw the money, similar to an individual RRSP
• Vesting rules can apply to a DPSP, meaning an employee who leaves early may forfeit some employer contributions, unlike an RRSP where contributions belong to the employee immediately
• These plans are typically set up and administered through a third-party provider or financial institution, with the business's accountant and an HR or benefits advisor involved in the setup

How This Fits Alongside a Business Owner's Own Retirement Strategy

Many incorporated business owners have already maximized their personal RRSP room, or find it doesn't accumulate quickly given how they pay themselves through the corporation. Some look instead to strategies such as corporate-owned life insurance or an Insured Retirement Plan to supplement retirement income beyond what registered accounts alone can provide. These are separate, personal strategies from an employee-facing Group RRSP or DPSP, but owners often work through both in the same overall retirement conversation with their advisor.