Deferred profit sharing plans

By Andre Domise

A Deferred Profit Sharing Plan (DPSP) is a nifty, group savings program that’s often overlooked and misunderstood. The DPSP, if you’re lucky enough to participate in one, is one of the most flexible and beneficial savings plans out there. Unlike the Defined Contribution Pension Plans (DCPP), you don’t actually put money towards the DPSP. All contributions towards a DPSP come from the employer.

Usually, the employer will pitch in a minimum amount of contributions, either based on your salary, or on the company’s annual profits. If they’re generous, they’ll give you a base amount of contributions, and then match the contributions you make into your Registered Retirement Savings Plan (RRSP) with their own deposits to the DPSP. For example, with a 50% match, if you make a bi-weekly contribution of $100 to your company RRSP, you’ll see an additional $50 deposited to your DPSP.

Unlike a group RRSP, you don’t actually “own” the money in the DPSP. With an RRSP, you would be able to withdraw your savings as cash (with a tax penalty), or transfer the money to another institution. DPSP money, on the other hand, is held in trust for you by the plan sponsor (the investment company that sets up your plan).

You would usually need to participate in the plan for 2 years before the money becomes vested. If you leave the company or leave the plan before the vesting period, your employer keeps the DPSP money. Even after the vesting period, you would not be able to withdraw or transfer DPSP funds while you’re an active employee with that company. They don’t become available to you until you’ve left the company, retired, or left the plan.

There is a nice upside, though.

Unlike DCPP, the money in a DPSP is not considered “locked-in.” When you retire, you can actually transfer the DPSP balance over to your RRSP, creating a hefty nest-egg. You can also transfer the balance of the DPSP to your personal RRSP as cash. So, if you’ve made some wise investment decisions with your personal accounts, the DPSP can provide a nice boost to your retirement savings. No need to worry about how much money you can unlock while you’re retired. If you ran into unexpected financial difficulty, you would be able to draw from those funds as a last resort.

One thing to look out for: DPSP contributions trigger a pension adjustment (PA).The pension adjustment is a correction made to your annual RRSP contribution room, based on how much money has been deposited to your group retirement and pension plans. Before cutting a large cheque to your financial advisor for last-minute RRSP contributions, you’ll need to make sure the money deposited to your DPSP won’t put you over the limit.