Pension plans & DSLPs — New temporary relief measures
Pension plans & DSLPs — New temporary relief measures
Relief for employers who sponsor deferred salary leave plans or registered pension plans
Finance has announced new temporary relief measures for employers who sponsor deferred salary leave plans (DSLPs) or registered pension plans (RPPs) for their employees. According to a recent news release dated July 2, 2020, Finance's draft regulations are intended to help employers manage and maintain their employee benefit obligations throughout the COVID-19 pandemic. The relief is also intended to allow employees who participate in DSLPs to suspend or defer their scheduled leave for a limited time without putting their plan at risk. Notably, this DSLP relief formalizes the CRA administrative relief offered earlier this summer while Finance completed its review of the DSLP rules.
This relief would introduce temporary stop-the-clock measures, for the period of March 15, 2020 to April 30, 2021, so that an employee's DSLP does not need to be terminated if the employee suspends a leave of absence to return to work or the employee chooses to delay their paid leave of absence.
Ordinarily, to enjoy the tax deferral benefits available under a DSLP, an employee's deferral period under the plan cannot be longer than six years and the employee's leave of absence must generally be a continuous period of at least six months. If an employee's DSLP ceases to meet these criteria, the plan must be terminated by the employer and all deferred salary must be paid to the employee and included in their income.
The proposed draft regulations include the following relief:
- Two leave periods will be considered one consecutive leave of absence if an employee on leave returns to work on or after March 15, 2020 and resumes their leave of absence before May 1, 2021
- If the leave of absence resumes in 2020, the deferred salary must be fully paid by the end of 2021
- If the leave of absence resumes in 2021 (but no later than April 30), the deferred salary must be fully paid by the end of 2022
- An employee may postpone the start of their leave of absence by up to 14 months if the employee has not yet started a leave of absence and their deferral period would first exceed six years between March 15, 2020 and April 30, 2021.
Relaxation of borrowing restrictions
This relief will temporarily allow RPPs to enter into a loan or a series of loans after April 2020, as long as the loan or series is repaid no later than April 30, 2021.
Generally, except for limited circumstances, a registered pension plan is prohibited from borrowing unless such borrowing is limited to a maximum term of 90 days, is not part of a series of loans or repayments and is not secured by property of the RPP under section 8502 of the Income Tax Regulations. This relief effectively extends the maximum 90 day term of allowable borrowings temporarily but does not change the restriction on RPP property being used as security.
Catch-up money purchase contributions in respect of 2020
This relief would permit retroactive contributions to an employee's money purchase account to replace required contributions that were not made in 2020. These retroactive contributions would generally need to be made after 2020 and before May 2021. Where the above conditions are met, the retroactive contributions would be added to the employee's pension adjustment for 2020 to ensure retroactive contributions plus regular contributions in 2021 do not exceed the maximum contribution limit (the pension adjustment limit) for 2021.
Pension coverage during periods of reduced pay
This relief will broaden the definition of "eligible period of reduced pay" to allow RPPs to recognize full pensionable service for more employees experiencing a period of reduced work and pay during COVID-19.
The proposed draft regulations include the following relief for 2020:
- Allow employers to provide unreduced pension coverage to all employees, including newer employees, by temporarily removing the requirement that employees must be employed for at least 36 months to qualify for an "eligible period of reduced pay"
- Remove the requirement that a reduction in pay must be generally commensurate with a reduction in work hours. For example, if an employee works full-time for a period in 2020 during which wages are reduced by 20%, the proposed relief would permit the employer to provide pension coverage based on 100% of the wages that existed before the reduction.
For more information, please contact your KPMG advisor.
Information is current to July 14, 2020. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500
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