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9 8503(1) & 8503(2) – Defined Benefit Provisions

9.1 8503(1) – Net Contribution Account

The net contribution account is a concept, rather than necessarily a true account, which exists in order to ensure that members retain their rights to their own contributions plus amounts transferred in from other plans or provisions, plus interest, to the extent that they have not been used to pay the benefits promised under the plan. In combination with paragraph 8503(2)(h) of the Regulations, for example, it permits a refund of excess employee contributions on termination of employment.

For purposes of “reasonable rate” of interest on a net contribution account, we consider acceptable the assumptions described below, as long as they are reasonable at the time they are used:

Acceptable assumptions:

  • Fund rate
  • 5 years personal deposit rate (CANSIM series)
  • Long term Government Canada bonds (CANSIM series)

We also accept the minimum assumptions that are required to be used by reason of the federal PBSA, 1985 or a similar law of a province.

Keep in mind that the determination of whether an assumption is reasonable can only be made on the specific circumstances of each case. What we accept in one case may not be acceptable for a similar case at another time.

In general, CANSIM + 2%, would not be accepted defacto in an internal policy without looking at the specific case. If CANSIM + 2% has historically been lower than the fund rate or is for a specific year, it would be reasonable for that year but not necessarily always, unless the rate of interest is “capped” by the fund rate.

Note:

The minimum interest rate on employee contributions to a defined contribution plan is the fund rate of return based on the market value of investments.

Plan Text:

Plans do not have to explicitly provide for a net contribution account. If they provide for the refund of contributions to the member or amounts transferred in, they must do so in a manner that does not conflict with the net contribution account concept, in combination with the other applicable areas of the Regulations. This means, for example, that they could not provide for unreasonable rates of interest on contributions.

Where an employer is utilizing a reciprocal agreement, the new employer cannot recreate the employee's previous net contribution account with employer contributions or plan funds. Under a reciprocal agreement, where no funds are transferred between plans, the net contribution account under the importing plan starts at 0. The net contribution account the individual had under the exporting plan must also be extinguished.

Cross Reference:

Permissible Distribution – Retroactively Non-Contributory – 8502(d)(iv)

9.2 8503(2) – Permissible Benefits

A general reference in the plan that the payment of benefits may be made in an optional form (i.e. in a form other than the normal forms) is acceptable if the plan terms state that the optional forms are subject to the limitations imposed by the Act. This includes a member foregoing lifetime retirement benefits to receive a basic or additional bridge benefit, permissible under 8503(2)(b) and 8503(2)(l) of the Regulations, of an actuarial equivalent value. Otherwise, the optional forms must be specified.

A plan may state that additional or other benefits may be provided at the discretion of the employer (discretionary benefits). The plan need not be amended (i.e. naming the members and describing their entitlement) when the employer subsequently exercises such discretion, provided that the discretionary benefits are:

  • Described in the plan;
  • Subject to appropriate limits and conditions; and
  • There are no PA or PSPA consequences.

If one or more of these conditions are not met, advise the employer and plan administrator, or their representative, that a plan amendment is required whenever the employer exercises its discretion to provide discretionary benefits.

Regardless of whether an amendment is needed, ensure that there is no reason to believe that there is or will be funding for the discretionary benefits based on the possibility that they will be provided. Funding is only permissible when a member becomes factually entitled to discretionary benefits because the employer has exercised its discretion to provide them.


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9.3 8503(2)(a) – Lifetime Retirement Benefits

The general rule is that lifetime retirement benefits, which excludes bridging benefits, must be paid in equal periodic amounts. The exceptions are listed below.

9.3.1 8503(2)(a)(i) – Death Benefits

Member's benefits may be reduced after the spouse or common-law partner dies. This is often referred to as a joint and contingent pension. A similar benefit, where the spouse or common-law partner receives a reduced pension after the death of the member, is permitted as a death benefit under 8503(2)(d). There is no restriction on the percentage reduction of the pension payable after the spouse's or common-law partner’s death.

9.3.2 8503(2)(a)(ii) – Cost-of-living Adjustments

Plans may provide for regular indexing, capped by CPI, from the date the lifetime retirement benefits commence to be paid. There is no age restriction.

Plans may provide for 4% annual increases to pensions in pay, whether or not the 4% is warranted by CPI. However, the maximum pension, section 8504 of the Regulations, restricts the lifetime retirement benefits in years following the commencement year to the maximum formula plus increases as warranted by CPI. This means that a plan, which pays benefits at the maximum level with 4% indexing, would, in effect, be restricted to the lesser of 4% and CPI. The CPI cap would likely not affect a less generous plan, for example an integrated plan, if it provided for 4% indexing.

Where the excess earnings approach is used, it should be reasonable to expect that the present value of the additional benefits will not exceed the present value of the greater of CPI and a flat 4% indexing.

Clause 8503(2)(ii)(D) allows combinations of CPI, 4% and excess earnings indexation as long as the present value of the indexation payable can't reasonably be expected to exceed the present value of the greater of CPI and 4% indexing. Check any combination provisions carefully to ensure that they do not, in themselves, contravene this requirement (e.g. a plan which provided for indexation based on the greater of an excess earnings rate and 5% would automatically contravene).

9.3.3 8503(2)(a)(iii) – Ad Hoc Increases

Plans may provide ad hoc increases to the pensions for retired members from time to time under this subparagraph. Lump sum catch-up payments are not permitted where indexing is provided to retired members who have commenced pension payments.

If a plan provides for ad hoc indexing at the discretion of the administrator, it is unnecessary for us to receive an amendment, board resolution, or other documentation should the administrator exercise that discretion. However, actuarial valuation reports must show ad hoc indexing. Clauses that give authority to increase benefits in this way must state that the increases will be warranted by increases in CPI.

Some plans do not provide general authority to increase benefits. Instead, they occasionally amend the plan or attach an appendix to add the increase. In these cases, we must be satisfied that the increase is warranted by CPI. If it is not obvious that this is the case, we should ask the administrator for written confirmation.

9.3.4 8503(2)(a)(iv) – Additional Lifetime Retirement Benefits

The member’s benefits may be increased as a result of additional lifetime retirement benefits being provided. For example, the plan may increase the benefit accrual rate retroactively for all members, active and retired or service with the employer that was previously not pensionable service under the plan becomes pensionable service for all members.

9.3.5 8503(2)(a)(v) – Early Retirement

The plan may provide for an adjustment to lifetime retirement benefits where the adjustment reduces or eliminates the portion of an early retirement reduction that was not required to be applied in order to comply with the early retirement rules in paragraph 8503(3)(c) of the Regulations. In other words, if the member’s pension was subject to an early retirement reduction under paragraph 8503(3)(c) at the time the member commenced to receive lifetime retirement benefits, the reduction cannot be completely eliminated later when the member reaches one of the 60/30/80 factors.

9.3.6 8503(2)(a)(vi) – Disability Benefits

Some DB plans provide that a member’s pension is to be reduced to reflect disability benefits provided to the member under the Canada or Quebec Pension Plans, worker’s compensation or private insurance plans. Normally, the offset to the RPP pension is eliminated when the other benefits cease to be paid. Subparagraph (vi) allows for the adjustment in the lifetime retirement benefits in this situation.


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9.3.7 8503(2)(a)(vii) – Optional Forms – Increased

Most plans offer optional forms of survivor benefits based on the actuarial equivalent of the normal form. Some of these optional forms will decrease the amount of lifetime retirement benefits the member will receive. Subparagraph (vii) allows a member’s benefit to be increased due to a change in form of survivor benefit after the member commences to receive their lifetime retirement benefits. For example, the member has a spouse or common-law partner when they retire and has chosen a joint and survivor form of pension. The spouse or common-law partner dies a few years later. The plan can allow the member to change the form of benefit to a life only.

9.3.8 8503(2)(a)(viii) – Optional Forms – Decreased

This provision is similar to subparagraph (vii) above. In this case, the plan can provide for a decrease in the member’s lifetime retirement benefits due to a change in form of survivor benefit after the member has commenced to receive lifetime retirement benefits. For instance, the member has no spouse or common-law partner when they retire and chooses a life and 10 form of benefit. The member later marries or enters into a common-law relationship and decides to change the form of benefit previously chosen to a joint and survivor benefit. Subparagraph 8503(2)(a)(viii) allows for the decrease in the member’s lifetime retirement benefits due to the change in the form of benefit.

9.3.9 8503(2)(a)(ix) – Postponed Retirement

This subparagraph allows a member whose retirement is postponed to receive a partial pension during the postponement period to compensate for a reduction in remuneration. The pension is then increased to the full amount when the member actually retires.

9.3.10 8503(2)(a)(x) – Adjustments Approved by the Minister

The member’s benefits can be adjusted in accordance with an amendment submitted to the CCRA before April 19, 2000, as long as we approved the amendment in writing and the benefits begin to be paid before 2003.

Plans do not necessarily have to contain the words "equal, periodic"; however, we must ensure that the plan does not provide for benefits which are other than equal and periodic unless they fall within the exceptions listed above.

Shortened Life Expectancy

Some provincial legislation allows a plan to provide for a fixed term pension if the person has a condition that is likely to shorten considerably the person's life expectancy. The Regulations were designed to cover premature death through the 15-year guarantee period and the commutation provisions. The guarantee period was included to ensure that a member would get at least 15 years of benefits. We will therefore not accept a provision allowing for a term certain on shortened life expectancy. The member could, however, commute the benefit and roll it to an RRSP and take it from the RRSP in whatever form the province will allow.

Lump sum catch-up payments

The plan cannot provide for lump sum payments to make up for periodic payments that are missed or paid in the wrong amount because such a provision would conflict with the equal periodic rule, even if subject to the Minister's prior approval. If such a payment is made, it causes the registration to be revocable because is it not a permissible distribution.

Grandfathered Plans:

There is no general grandfathering provision for benefits in conflict with paragraph 8503(2)(a). A grandfathered plan has to comply with this rule from January 1, 1992. This applies to pre-reform benefits accrued under the plan as well as benefits in pay.

The limited grandfathering provisions that do exist are:

  • 8509(9) - For a plan that is not a grandfathered plan, retirement benefits that have commenced to be paid before 1992 are not subject to paragraph 8503(2)(a) but do have to be acceptable to the Minister.
  • 8509(4.1) - The Minister can grandfather disability benefits for a member who became disabled before 1992. This allows us to grandfather benefits that offend the equal periodic rule such as the recalculation of a disability pension at retirement age.
  • 8509(4) - The Minister can exempt pre-reform death benefits from the conditions in 8502(c), which would include the equal periodic rule, should any such conflict arise.

Cross Reference:

Payment of Pension – 8502(e)

9.4 8503(2)(b) – Bridging Benefits

All bridging benefits, except additional bridging benefits permissible under paragraph 8503(2)(l) of the Regulations, are subject to the CPP/QPP/OAS cap and age and service restrictions in this paragraph.

Bridging benefits payable to a member may be funded by employer contributions, by employer and member contributions, or be funded as an optional form by the member foregoing a proportionate amount of lifetime retirement benefits.

In a plan where benefits are reduced by any public pension benefits (CPP/QPP, OAS) that become payable, the portion of the benefit, which will disappear when the public pension benefits are paid, is a bridging benefit by definition.

Combination plans that contain a MP provision for future service and a DB provision (single purchase annuity) for years of past service may provide bridging benefits based on the pensionable years of service under the DB provision only.

Plan Text:

Where the bridge is funded by employer or employer and member contributions, it must be set out in the plan and it must be apparent that it will not exceed the appropriate limits.

Where the bridge is an optional form, it can be an explicit or an implicit benefit. If explicit, it must be apparent that the bridge benefit will not exceed the limits under paragraph 8503(2)(b) of the Regulation or paragraph 8503(2)(b) in combination with paragraph 8503(2)(l). If it is implicit, as with any optional form of benefit, we require some reference to it being subject to the limits and conditions of the Act.

The requirements of paragraph 8503(2)(b) may be satisfied by the plan stating that the bridge is subject to paragraph 8503(2)(b), by stating generally that it is subject to the requirements of the Act (this is the most common when the bridge is implicit as an optional form of benefit), or by itemizing the restrictions in the plan text. In the latter case, it must be clear that the bridge will not exceed:

  • The particular member's maximum entitlement to CPP as if the member were 65, calculated based on the ratio of the member's best three years' remuneration to YMPE for those years, plus the maximum OAS;
  • Reduced by 0.25% per month to age 60 (unless the member is totally and permanently disabled at the time the bridge starts to be paid and is not a connected person); and
  • Prorated by the ratio of the member's years of pensionable service to 10 years.

The bridge benefit may be indexed for increases to CPI.

A plan cannot allow for bridging benefits to cease when CPP/QPP or OAS payments begin. Payments of government pensions can be deferred until after age 65. A plan cannot allow for bridging benefits to begin when the member is eligible to begin his public pension benefits. The plan must specifically provide that bridging benefits can cease no later than the end of the month immediately following the month in which the member attains 65 years of age.

As stated earlier, when the bridge is an optional form of benefit whereby the member foregoes lifetime retirement benefits to receive it, paragraph 8503(2)(b) works in combination with paragraph 8503(2)(l) to restrict the benefits payable. In other words, paragraph 8503(2)(l) eliminates any age or service reduction that is otherwise applied by paragraph 8503(2)(b).

In Question 3 of Newsletter No. 94-2 it is mentioned that “to provide additional bridging benefits in accordance with paragraph 8503(2)(l), an RPP has to provide or permit basic bridging benefits...”. In situations where bridging benefits are provided as an optional form in accordance with paragraph 8503(2)(l) even though the plan does not provide basic bridging benefits, the additional bridging benefit must be capped by paragraph 8503(2)(b) (without the age and service reduction) and comply with paragraph 8503(2)(l) (actuarial equivalent of lifetime retirement benefits foregone). Where a plan does not provide for basic bridging benefits, we consider that the bridging benefits resulting from an optional form are automatically in excess of bridging benefits that are permissible under paragraph (b) and therefore qualify as additional bridging benefits payable under paragraph 8503(2)(l).

Plans may not permit members to give up their lifetime retirement benefits in their entirety in order to receive a bridging benefit. Some lifetime retirement benefit, no matter how small, must remain. The words "commencing no earlier than the time that lifetime retirement benefits commence" in paragraph 8503(2)(b) of the Regulations impose this requirement.

Connected Persons:

If connected persons are participating in the plan and entitled to bridging benefits, the 10 year pro-ration is based on actual full-time service with a participating employer rather than pensionable service. If the bridge restrictions are detailed in the plan text, they should include this more restrictive service requirement for the connected persons.

MEPs:

The above restrictions on the bridging benefits payable to connected persons do not apply if the plan is a MEP (including SMEPs).

Grandfathered Plans:

The general rule that the bridging benefit may not exceed the amount of public pension benefits that would be payable to the member if age 65, entitled to full OAS and to CPP based on their highest three years' earnings, is not grandfathered unless exempted by Ministerial waiver under paragraph 8509(4)(b) of the Regulations.

The additional restrictions, which apply when members are less than age 60 or have fewer than 10 years of service, must be added for that portion of the bridging benefit that is in respect of years after 1991.

Where we have registered a pension plan after March 27, 1988 that provides for bridging benefits which do not comply with paragraph 8503(3)(b), bridging benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(b). However, the benefits must be acceptable to the Minister.

Cross References:

Definition of Bridging Benefits – 8500(1)

Additional Bridging Benefits – 8503(2)(l)

Bridging Benefits – Cross-Plan Restrictions – 8503(3)(k)

Commutation of Lifetime Retirement Benefits – 8503(7)

Limits Dependant on CPI – 8503(12)

Retirement Benefits Before Age 65 – 8504(5)

Conditions Applicable After 1991 to Benefits Under Grandfathered Plans – 8509(2)(a)

DB Under Grandfathered Plan Exempt form Conditions – 8509(4)(b)

Conditions Applicable to Amendments – 8511(1)(b)

Newsletter No. 94-2, Technical Questions and Answers

Newsletter No. 92-6, Pre-Reform Disability and Bridging Benefits


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9.5 8503(2)(c) – Guarantee Period

Paragraph 8503(2)(c) of the Regulations allows for a guarantee period to be attached to a member’s pension.

Where retirement benefits permissible under paragraph 8503(2)(d) are provided under the provision to a spouse or common-law partner or former spouse or common-law partner of the member, the member’s pension may be guaranteed for up to 5 years from the date of commencement.

Where retirement benefits permissible under paragraph 8503(2)(d) are not provided under the provision to a spouse or common-law partner or former spouse or common-law partner of the member, the member’s pension may be guaranteed for up to 15 years from the date of commencement.

A member’s pension may be guaranteed when retirement benefits under paragraph 8503(2)(d) are provided to a dependant. The guarantee period is limited to 15 years unless paragraph 8503(2)(d) retirement benefits are also payable to a spouse or common-law partner, in which case the guarantee period has to be limited to 5 years.

The guarantee is on the member’s pension. If a member dies before the end of the guarantee period, the unreduced retirement benefits can continue to be paid to the member’s beneficiary until the end of the guarantee period, following which the beneficiary under a joint and survivor pension may receive a reduced pension.

If both the plan member and the member's beneficiary die before the end of the guarantee period, the unreduced retirement benefits can continue to be paid to the member's estate until the end of the guarantee period.

By virtue of paragraph 8503(2)(n), an RPP may permit or require guaranteed retirement benefits to be commuted rather than paid on a periodic basis.

All plans may apply the provisions of paragraph 8503(2)(c) with respect to pre-reform benefits.

Grandfathered Plans:

Grandfathered plans do not have to comply with this condition until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(c). However, the death benefits must be acceptable to the Minister.

Cross Reference:

Pre-Retirement Death Benefits – 8503(6)

9.6 8503(2)(d) Post-retirement Survivor Benefits

Plans may provide for joint pensions of up to 66 2/3% to a spouse or common-law partner, former spouse or common-law partner, or dependant. The definition of "dependant" under subsection 8500(1) of the Regulations includes grandparents and grandchildren, who were not included as dependants under Information Circular 72-13R8. A survivor benefit can be provided to the dependants, as defined for purposes of the Regulations, based on all years of service.

Such joint pensions may benefit more than one individual, as long as the individual qualifies as a spouse or common-law partner, former spouse or common-law partner or dependant. The benefits payable to the various beneficiaries may not exceed 100% of the amount, which the member was receiving before his death, and no one individual, may receive more than 66 2/3%. If a minor dependent is entitled to benefits, it is acceptable to pay the benefit to the person fiscally responsible for the dependent’s care rather than the dependent.

A plan may provide a post retirement death benefit after pension has commenced to be paid, so long as the member’s equal, periodic payments are not altered.

The 66 2/3% limit applies to retirement benefits, which include both lifetime retirement benefits and bridging benefits. The beneficiary could therefore receive up to 66 2/3% of what the member was receiving, including 66 2/3% of the bridging benefit.

Plans will often provide a separate normal form for married members and single members. The text will state that all optional forms will be "actuarially equivalent" to the normal form. We should not question which of the normal forms the optional form will be equivalent to, because we assume that they will use the form that relates to the individual.

Grandfathered Plans:

Joint and survivor pensions in excess of 66 2/3% as a normal form may have been accepted in grandfathered plans on the basis that they were actuarially equivalent to a maximum pension based on joint and 60% (see paragraph 9(g) of Information Circular 72-13R8). Where that is the case, Ministerial exemptions under paragraph 8509(4)(a) will be granted for death benefits that relate to lifetime retirement benefits accrued before 1992. We will not, however, give exemptions if the plan provides a 2% pension based on a normal form in excess of 66 2/3%.

We will grant exemptions under paragraph 8509(4)(a) for joint and survivor pensions where the survivor may be someone other than the spouse or former spouse as defined in subsection 147.1(1). The exemptions apply only to the portion of the survivor benefits that relate to lifetime retirement benefits accrued before 1992.

Where we have registered a pension plan after March 27, 1988 that provides death benefits that do not comply with paragraph 8503(2)(d), any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(3)(d). However the death benefits must be acceptable to the Minister.

Cross References:

Post-Retirement Survivor Benefits – 8503(2)(c)

Additional Post-Retirement Death Benefits – 8503(2)(k)

Information Circular 72-13R8, Employees’ Pension Plans

9.7 8503(2)(e) – Pre-retirement Survivor Benefits

Rather than a form of pension chosen by the member, with an attached death benefit (i.e. guarantee period or joint pension), this pension is payable only to the survivors where the member dies before receiving any pension benefit. Information Circular 72-13R8 referred to this type of pension as a death benefit (paragraph 9(e)), rather than a form of pension (paragraph 9(g.2)(i)).

Plan Text:

It is acceptable for a plan to provide as a death benefit to the spouse or common-law partner or former spouse or common-law partner or dependant, periodic payments amounting to 66 2/3% of the lifetime retirement benefits (excludes bridging benefits) which the member would have received at his date of death had he retired on a pension which was not reduced for early retirement. It is also acceptable for a plan to provide up to 66 2/3% of what the members would have received had they continued in employment to age 65 at the rate of pay they were earning in the year of death, as long as the deeming of the additional years of service does not result in an annual death benefit pension which is greater than 3/2 of YMPE. If the member's accrued benefit without deeming of service was already in excess of 3/2 of YMPE, no service could be deemed, and the death benefit could not exceed 66 2/3% of the actual accrued benefit. If a minor dependent is entitled to benefits, it is acceptable to pay the benefit to the person fiscally responsible for the dependent’s care rather than the dependent.

More than one spouse or common-law partner, former spouse or common-law partner or dependant may receive the death benefit, but the total benefits can't exceed the member's accrued unreduced lifetime retirement benefits, with the deeming of service to age 65 described above. For example, a spouse or common-law partner might receive a pension of 50% of the member's accrued pension for life, and two dependants might receive pensions of 25% of the accrued pension until the end of the eligible survivor benefit period.

These benefits may be indexed for CPI.

Connected Persons:

The additional amount that the member would have received had they continued in employment until age 65 is not available to connected persons.

MEPs:

The restriction regarding connected persons does not apply if the plan is a MEP (including SMEPs).

Grandfathered Plans:

We will grant exemptions under paragraph 8509(4)(a) in grandfathered plans that provide that the survivor may be someone other than the spouse, common-law partner or former spouse or common-law partner or dependant as defined in subsection 8500(1). The exemptions apply only to the portion of the survivor benefits that relate to lifetime retirement benefits accrued before 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits which do not comply with the conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(3)(e). However, the benefits must be acceptable to the Minister.

Cross References:

Pre-Retirement Survivor Benefits – Guarantee Period – 8503(2)(g)

Lump Sum Payments on Termination – 8503(2)(h)

Lump Sum Payments on Death – 8503(2)(j)

Commutation of Benefits – 8503(2)(n)

Limits Dependent on CPI – 8503(12)

Transfer – Lump Sum Benefits on Death – 147.3(7)

Information Circular 72-13R8, Employees’ Pension Plans


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9.8 8503(2)(f) – Pre-Retirement Survivor Benefits – Alternative Rule

The basic difference between paragraphs 8503(2)(e) and 8503(2)(f) of the Regulations is that under paragraph 8503(2)(e) an annual amount is determined. Under paragraph 8503(2)(f) of the Regulations, a value rather than an annual amount is determined.

The spouse may receive a pension equal in value to the value of the member's accrued benefit. The actual amount payable to the spouse or common-law partner or former spouse or former common-law partner will depend on the member's accrued benefit, the spouse's or common-law partner’s age, and whether or not the spouse or common-law partner elects to attach a guarantee to the benefit.

Plan Text:

Where pre-retirement death benefits are provided under a plan, determine whether it is a benefit under paragraph 8503(2)(e) or paragraph 8503(2)(f). If it is a benefit under paragraph 8503(2)(f), ensure that it is only payable to a spouse or common-law partner or former spouse or common-law partner and not a dependant.

Also ensure that the plan states that the death benefit will be payable by the later of one year after the day the member died and the end of the year the spouse or common-law partner or former spouse or common-law partner turns 71.

Finally, ensure that the death benefit will be paid in equal periodic amounts, with the only exceptions being those permitted under paragraph 8503(2)(a).

Grandfathered Plans:

We will grant exemptions under paragraph 8509(4)(a) for survivor pensions where the survivor may be someone other than the spouse, common-law partner or former spouse or former common-law partner. The exemptions apply only to the portion of the survivor benefits that relate to lifetime retirement benefits accrued before 1992.

In addition, death benefits relating to lifetime retirement benefits accrued before 1992 will be exempted if they can be interpreted as complying with paragraph 9(f) of Information Circular 72-13R8.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(f). However, they must be acceptable to the Minister.

Cross References:

Payment of Pension – 8502(e)

Pre-Retirement Survivor Benefits – Guarantee Period – 8503(2)(g)

Lump Sum Payments on Death – 8503(2)(j)

Commutation of Benefits – 8503(2)(n)

Transfer – Lump Sum Benefits on Death – 147.3(7)

Information Circular 72-13R8, Employees’ Pension Plans

9.9 8503(2)(g) – Pre-Retirement Survivor Benefits – Guarantee Period

This allows a guarantee period of up to 15 years to be attached to a pre-retirement survivor benefit, as set out in paragraphs 8503(2)(e) and 8503(2)(f) of the Regulations. The remainder of the guarantee period may be paid to any beneficiary.

Grandfathered Plans:

These restrictions do not apply to grandfathered plans until 1992.

Where we have registered a pension plan after March 27, 1988 that provides death benefits that do not comply with paragraph 8503(2)(g), any such benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(g). However, the benefits must be acceptable to the Minister.

Cross References:

Pre-Retirement Survivor Benefits – 8503(2)(e)

Pre-Retirement Survivor Benefit – Alternative Rule – 8503(2)(f)


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9.10 8503(2)(h) – Lump Sum Payments on Termination

It is not necessary for plans to establish or refer to net contribution accounts as long as the rules relating to returns of employee contributions are met.

Plans may provide that on a member's termination from the plan (including retirement, termination of employment, termination of the plan and termination of membership), employee contributions and amounts transferred to the plan for the member, plus interest, may be refunded to the member as a lump sum to the extent that they were not paid to the member as part of any other entitlements under the plan. This may occur, for example, where members have funded more than half of their benefit and pension benefits legislation permits a refund of the excess. The excess would be the balance in the net contribution account after the payment of the benefit.

In certain circumstances, plans may provide that members will receive twice the employee contributions plus interest [2 x (contributions + interest)] minus whatever portion of the contributions formed part of any other pension benefits paid to them under the plan. The permissible circumstances are set out in subparagraph 8503(2)(h)(iii) and are administered as follows:

  • If the Minister has waived the application of paragraph 8503(4)(a) with respect to the provision, the provision will automatically be acceptable
  • If it is unclear that paragraph 8503(4)(a) would be satisfied if its reference to 70% was 50% instead, advise the administrator that we require a demonstration that paragraph 8503(4)(a) would be so satisfied before we can approve the provision.

The return of employee contributions must be the final payment to the member under the provision. In some instances, it will be the only payment to the member. This would occur where a plan promised a certain DB benefit but guaranteed that in no event would the benefit be less than the employee contributions plus reasonable interest.

Where a plan, including a flexible pension plan, provides up to two times contributions at termination and/or death, the plan must state that the lesser contribution limit in clause 8503(2)(h)(iii)(B) applies only to Members entitled to such a return.

Some plans provide two vesting schedules. The first is determined by the employer, the other is imposed by the PBSA or Provincial Benefits Act. The imposed vesting period is normally not retroactive so many plans promise a return of contributions in respect of service before the imposed vesting period and a commuted value payment in respect of service after the imposed vesting period. Where a plan wishes to provide a lump-sum refund in respect of the service before the imposition of the mandatory vesting period and the commuted value or an annuity in respect of all other periods, we will not insist that the lump-sum be the last payment made from the provision.

If a plan provides that the pension payable will:

  • Never be less than what can be provided by the member’s contributions or by twice the amount of the contributions; or
  • The greater of the accrued benefit and the pension from the member’s contributions.

The pension is unacceptable unless the pension is grandfathered for pre-reform years.

Paragraph 8503(2)(h) of the Regulations provides that any payment from the net contribution account must be as a single amount. No DB Regulations allows for a periodic payment from the member’s net contribution account. Periodic payments based on a member’s contributions are acceptable if made with regard to subparagraph 8502(c)(iii).

SMEPs:

Although paragraph 8510(6)(c) indicates that they are exempted from paragraph 8503(4)(a) of the Regulations, SMEPs must still fall within the circumstances outlined above in order to be able to provide for a return of twice employee contributions.

Grandfathered Plans:

Grandfathered plans do not have to comply with the requirements of 8503(2)(h) until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any retirement benefits which have commenced to be paid before 1992 are not affected by 8503(2)(h). However, such benefits must be acceptable to the Minister.

Cross References:

Flexible Pension Plans – 147.1(5)

Waiver of Member Contribution Condition – 8503(5)

Member Contributions – 8503(4)(a)

Newsletter No. 96-3, Flexible Pension Plans

9.11 8503(2)(i) Commuted Value – Pre-retirement Death

Plans may provide pre-retirement death benefits to beneficiaries other than the spouse, common-law partner, former spouse or former common-law partner. Such benefits must be paid in lump sums and as soon as practicable after the member's death. Plans will not be required to state that the benefit will be paid as soon as practicable. Our rule of thumb, however, will be that the benefits should be paid within one year of the member's death. If a plan states that the benefits will be paid out later than one year after the member's death, it will have to be amended.

Such lump sum death benefits may be provided to more than one beneficiary, but we must ensure that plans do not provide for the payment of total death benefits in excess of the present value of the member's accrued benefit.

We must also ensure that plans do not allow for lump sum death benefits to be paid in combination with periodic death benefits. One or the other may be made available to beneficiaries, but not both.

Grandfathered Plans:

These restrictions do not apply to grandfathered plans until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits which commenced to be paid before 1992 are not affected by 8503(2)(i). However, they must be acceptable to the Minister.

Cross Reference:

Undue Deferral of Payment – 8503(4)(d)

9.12 8503(2)(j) – Lump Sum Payment on Death

If plans provide for a return of any employee contributions that were not used to fund death benefits, it must be clear that they will be the last payments in respect of the member. The payment may be made to any beneficiary, including the estate.

In cases where the plan provides for a return of employee contributions based on the member's net contribution account credited with twice the member's current service contributions, the following conditions must be met:

  • The member dies before the pension commences to be paid and a pre-retirement survivor pension is not payable; and
  • The lump sum payments on termination from the plan otherwise than by reason of death are subject to the limit of subparagraph 8503(2)(h)(iii).

Where a plan, including a flexible pension plan, provides up to two times contributions at termination and/or death, the plan must state that the lesser contribution limit in clause 8503(2)(h)(iii)(B) applies only to members entitled to such a return.

If the plan provides two vesting schedules, we will permit the surviving spouse or common-law partner or former spouse or common-law partner of a member to receive a lump-sum refund for periods of service before the mandatory vesting period and either the commuted value or an annuity (not available to beneficiaries) in respect of other periods of service. Thus, the requirement under paragraph 8503(2)(j) that the refund be “the last payment under the provision with respect to the member” can be ignored and the surviving spouse or common-law partner or former spouse or common-law partner can opt for an annuity instead of a lump sum.

Grandfathered Plans:

These restrictions do not apply to grandfathered plans until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(2)(j). However, they must be acceptable to the Minister.

Cross References:

Flexible Pension Plans – 147.1(5)

Lump Sum Payments on Termination – 8503(2)(h)

Member Contributions – 8503(4)(a)

Undue Deferral of Payment – 8503(4)(d)

Newsletter No. 96-3, Flexible Pension Plans

9.13 8503(2)(k) – Additional Post-retirement Death Benefits

Paragraph 8503(2)(d) of the Regulations limits the post-retirement survivor benefits to 66 2/3% and paragraph 8503(2)(c) limits the guarantee period on a member’s pension to 5 years where retirement benefits permissible under paragraph 8503(2)(d) are provided under the provision to a spouse or common-law partner or former spouse or common-law partner of the member.

Paragraph 8503(2)(k) of the Regulations permits benefits payable to a spouse or common-law partner or former spouse or common-law partner of a member to be increased from 66 2/3% to 100% and permits the guarantee period on a member’s pension, payable to any beneficiary, to be increased from 5 years to 15 years, both such increases being in lieu of a proportion of the member’s lifetime retirement benefits. In other words, the plan member can give up some of their LRB to get an enhanced survivor benefit.

In addition, the present value of the increased survivor pension and guarantee period cannot exceed the present value of what would have been paid had the plan member not opted for the increase. In determining the present value of what would have been paid, the Act allows the plan to assume that it has a 66 2/3% survivor benefit form. It does not, however, allow the plan to assume that there is a 5 year guarantee if the plan has less than a 5 year guarantee; that is, it allows the plan to assume a greater survivor benefit but not a greater guarantee period than the plan actually allows.

For example, a plan can provide a 100% survivor benefit, payable to a spouse or common-law partner or former spouse or common-law partner of the member, that has the same present value as a 66 2/3% plus the 5-year guarantee if the 5-year guarantee is provided for in the plan. If the 5-year guarantee is not provided for in the plan, then it cannot be assumed. If the plan had a 3-year guarantee, the plan can only take into account a 3-year guarantee in calculating the present value limit. If the plan had a 50% survivor benefit, the plan could assume a 66 2/3% survivor benefits for the purposes of the present value limit.

Plan Text:

If the plan permits the member to elect a joint and survivor pension, payable to a spouse or common-law partner or former spouse or common-law partner of the member, of greater than 66 2/3% and/or an increased guarantee period of up to 15 years, it must be lieu of a proportion of the LRBs otherwise payable and the present value of the enhanced benefits cannot exceed the present value of a 66 2/3% joint and survivor benefit. A reference to actuarial equivalence to the normal form would be acceptable for the purposes of the present value limit.

Grandfathered Plans:

The above restrictions do not apply to a grandfathered plan until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with the conditions, any death benefits that have commenced to be paid before 1992 are not affected by 8503(k). However, the benefits must be acceptable to the Minister.

Cross References:

Guarantee Period – 8503(2)(c)

Post-Retirement Survivor Benefits – 8503(2)(d)


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9.14 8503(2)(l) – Additional Bridging Benefits

This would normally be provided in a plan as an optional form of benefit. Where it is provided, it must be clear that it will not result in total benefits in excess of the actuarial equivalent of the normal benefit promised under the plan. It must be funded by the employee, in lieu of lifetime retirement benefits. Any bridging benefits that are paid in lieu of lifetime retirement benefits, on an actuarially equivalent basis, are not subject to the pre-65 maximum in subsection 8504(5) of the Regulations.

In Question 3 of Newsletter No.94-2 it is mentioned that “to provide additional bridging benefits in accordance with paragraph 8503(2)(l), an RPP has to provide or permit basic bridging benefits...”. In situations where bridging benefits are provided as an optional form in accordance with paragraph 8503(2)(l) even though the plan does not provide basic bridging benefits, the additional bridging benefit must be capped by paragraph 8503(2)(b) (without the age and service reduction) and comply with 8503(2)(l) (actuarial equivalent of lifetime retirement benefits foregone). Where a plan does not provide for basic bridging benefits, we consider that the bridging benefits resulting from an optional form are automatically in excess of bridging benefits that are permissible under paragraph (b) and therefore qualify as additional bridging benefits payable under paragraph 8503(2)(l).

A plan cannot allow for bridging benefits to cease when CPP/QPP or OAS payments begin. Payments of government pensions can be deferred until after age 65. A plan cannot allow for bridging benefits to begin when the member is eligible to begin his public pension benefits. The plan must specifically provide that bridging benefits can cease no later than the end of the month immediately following the month in which the member attains 65 years of age.

Section 91.1 of the Supplemental Pension Plans Act of Quebec provides to a member or spouse the right on retirement to replace, in whole or in part, the life pension accrued by a temporary pension which will not exceed 40% of the YMPE of the year in which the payment of the pension begins. Paragraph 8503(2)(l) was amended to accommodate this benefit.

Grandfathered Plans:

Grandfathered plans are not subject to this restriction until 1992.

Where we have registered a pension plan after March 27, 1988 that provides benefits that do not comply with these conditions, any retirement benefits which have commenced to be paid before 1992 are not affected by paragraph 8503(3)(l). However, the benefits must be acceptable to the Minister.

Cross References:

Bridging Benefits – 8503(2)(b)

Excluded Benefits – 8504(11)

Newsletter No. 94-2, Technical Questions and Answers

9.15 8503(2)(l.1) – Survivor Bridging Benefits

Paragraph 8503(2)(l.1) of the Regulations permits a spouse, common-law partner or former spouse or common-law partner of the deceased member to choose to receive bridging benefits in place of all or a portion of their survivor benefit.

Section 91.1 of the Supplemental Pension Plans Act of Quebec provides to a member or spouse the right on retirement to replace, in whole or in part, the life pension accrued by a temporary pension which will not exceed 40% of the YMPE of the year in which the payment of the pension begins. Paragraph 8503(2)(l.1) was introduced to accommodate this benefit.

9.16 8503(2)(m) – Commutation of Benefits

Deferred payment of amount in excess of prescribed amount

Commutation of benefits as a permissible benefit requires payment of one lump sum representing the value of the benefits commuted. The lump sum payment can take the form of a cash payment, a transfer to another plan, a purchase of an annuity, or a combination of one or more of these forms. Commutation is not a permissible benefit if payment occurs in more than one stage. Therefore, it is not permissible for:

  • An amount up to the prescribed amount to be transferred under subsection 147.3(4) of the Act; and
  • Any remaining balance (excess funds) to be retained to the member's credit for payment (plus interest) at a later date, under the DB provision.

Where a plan provides for retention of excess funds in the plan, it is likely because of the mistaken understanding that the excess funds can continue to be tax sheltered without consequence. In fact, however, once payment of the commuted benefits occurs, a MP provision is established for the excess funds. The excess funds are not a transfer between provisions of the same plan pursuant to subsection 8502(k) because the excess funds are an amount in excess of the prescribed amount. This means:

  • The plan has to meet the MP registration rules;
  • The excess funds have to be reported as income of the member for the year in which the commutation of benefits occurs, under paragraph 56(1)(a);
  • The tax withholding rules of paragraph 153(1)(b) apply to the excess funds;
  • The excess funds are considered a contribution to the MP provision and, as such, are deductible;
  • The excess funds have to be included in the member's pension credit and the PA limits have to be respected.

Failure to meet, or an expectation of failure to meet, the above requirements results in denial of registration. If the plan is already registered, the plan is revocable. In order to be considered for registration or to avoid revocation, excess funds have to be paid in cash to the member as part of the lump sum amount on commutation of benefits. In this regard, the plan can be silent.

If the plan terms do not provide for the above deferred payment, but in practice this is what is being or has been done, the plan is revocable. It is revocable for not being administered in accordance with the terms of the plan as registered.

Indexing assumptions

Subject to the restrictions below for connected persons, even if a plan doesn't provide for:

  • Indexation of benefits; or
  • Use of indexation assumptions when a member commutes benefits, an actuary can use indexing assumptions to determine the value of commuted benefits. However, the "additional benefits" resulting from the use of indexing assumptions have to be in accordance with subparagraph 8503(2)(m)(ii).

Locking-in

Commuted benefits don't have to be locked-in, as was previously required by paragraph 9(b) of Information Circular 72-13R8. Therefore, funds that have already been transferred on a locked-in basis under paragraph 9(b) may be unlocked, if the RRSP issuer is willing to amend the contract and if the governing federal PBSA or provincial PBA permits it.

Crediting of interest due to a delay in the payment of amounts

Immediate payment of a member's commuted benefits isn't always possible. Where payment is delayed, interest on the value of the commuted benefits, calculated as of the date they became payable, can be paid for the period between commutation and actual payment. However, to be a permissible benefit, the total amount eventually paid cannot be more than the value of the commuted benefits, calculated as of the date payment is made (maximum present value limit).

Example

The plan is terminated on July 1, 2002. A member instructs the plan administrator to transfer the member's entitlement to an RRSP. The actuary determines the present value of the member's commuted benefits to be $100,000. Payment is delayed 26 months until August 30, 2004. On August 30, 2004 the actuary redetermines the present value of the benefits accrued to July 1, 2002 to be $115,000. But accrued interest on the $100,000 over the 26-month period is $20,000. The member is only entitled to $115,000, not $120,000.

Notwithstanding the above, if:

  • The plan is silent about the payment of interest; and
  • The federal PBSA or similar provincial PBA requires interest to be paid,

Then the plan administrator has to pay it, even where the total payment is more than the maximum present value limit, to avoid revocation.

Where:

  • The plan is silent about the payment of interest;
  • The PBSA or PBA does not require interest to be paid; and
  • The plan permits a distribution of surplus to the member(s).

The amount in excess of the maximum present value limit is considered surplus and can be paid to the member in cash. In this case, the tax withholding and income inclusion rules of paragraph 153(1)(b) and paragraph 56(1)(a) of the Act apply.

Based on the above, where payment of interest is acceptable, the prescribed amount rules of section 8517 of the Regulations apply to the total amount that can be transferred tax-free to a MP provision, an RRSP or RRIF.

Early benefit payable during phased retirement

Section 69.1 of the Supplemental Pension Plans Act of Quebec allows an active member who is within 10 years of the normal retirement age specified in the plan and whose working time is reduced pursuant to an agreement with his employer, to receive each year upon request, a lump sum amount from the plan to compensate in part for the reduction in salary. It has been determined that this benefit represents the commuted value of a portion of the member’s life pension that is being paid in a lump sum, in compliance with paragraph 8503(2)(m) of the Regulations. Therefore, such a provision in a plan text is acceptable. Section 69.1 of the SPPA also provides that the member can continue to accrue benefits for current service during years in receipt of this lump sum benefit.

Plan Text:

A plan can provide for the commutation of benefits at any time, including benefits that have already begun to be paid. However, the plan terms must indicate that:

  • The commuted value of the benefits will not exceed the present value of the benefits forgone at the time of payment; and
  • If the commuted benefits relate to pre-reform service:
    • The period of pre-reform service cannot be re-credited with that employer or a successor employer; or
    • The amount necessary to fund the pre-reform benefits has to be transferred directly from an RRSP, DPSP or another RPP of the member.

The requirement for pre-reform service also applies to a combination MP/DB plan, where only MP contributions are commuted. In this case, the plan cannot be amended to increase the DB benefits for the years of service relating to the commuted MP benefits.

On commutation, a plan cannot provide for deferred payment out of a DB provision of an amount in excess of the prescribed amount. However, the excess amount may be payable out of a MP provision.

A plan must not provide for a guaranteed rate of interest on the value of a member's commuted benefits for the period between benefits becoming payable and actual payment being made. However, the plan can provide for an entitlement to interest during this period if it is clear that the interest plus the value of the commuted benefits, calculated as of the date benefits became payable, won't exceed the maximum present value limit. Note that if the plan provides for a transfer of commuted benefits plus interest on the commuted value, there should be no indication that the interest is excluded from the prescribed amount limit.

Connected Persons:

Unless the member has terminated employment or retired, or the plan has terminated, commutation of:

  • Benefits for pre-reform service of partners or proprietors (or their spouses/common-law partners); or
  • Benefits for pre-reform service under pre-October 1968 and 1980 shareholder plans is not permitted.

Even on termination or retirement, additional benefits cannot be provided by the use of indexing assumptions in the calculation of the value of commuted benefits:

  • For pre-reform service of partners or proprietors (or their spouses/common-law partners); or
  • Under pre-October 1968 and 1980 shareholder plans.

Bill 102 of the province of Quebec establishes several new types of benefits that are effective in 1997 and in 1998. These benefits such as the early benefit during phased retirement and the temporary pension on early retirement among others, entail the commutation of LRBs. Commutation of pre-reform benefits accrued to connected persons, partners, proprietors and their spouses would be allowed but only for the payment of a benefit provided under Bill 102. Any other commutation of benefits accrued to such members will be subject to the requirements of the Information Circular 72-13R8 and all other administrative rules derived from this Circular.

Plans that are subject to the 50% rule can apply the indexing assumptions in determining the value of commuted benefits for pre-reform service if the 50% rule is satisfied as at the date of commutation.

Grandfathered Plans:

Where a plan was submitted after March 27, 1988 and is not a replacement of a grandfathered plan, payment of an amount exceeding the amount permitted under 8503(2)(m) is acceptable if:

  • Commutation occurred before 1992; or
  • Commutation occurs after 1991, but the pension started to be paid before 1992 and the amount of the payment is acceptable to the Minister.

Cross References:

Transfer – DB to MP, RRSP or RRIF – 147.3(4)

Definition Money Purchase Provision – 8500(1)

Conditions for Registration – 8501(1)(e)

Determination of Amounts – 8502(j)

Rule for Commutation of Benefits – 8502(2.1)

Commutation of Lifetime Retirement Benefits – 8503(7)

Payment from Account – 8506(1)(f)

Commutation of Benefits – 8506(1)(h)

Benefits Under Plan Other Than Grandfathered Plans – 8509(9)

Prescribed Amount – 8517

Newsletter No. 94-2, Technical Questions and Answers

Newsletter No. 92-12, Commutation and Opting Out of a Pension Plan


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9.17 8503(2)(n) – Commutation – Beneficiary's Benefits

Plans may provide that death benefits payable as periodic payments may be commuted. They do not have to state that the commuted amount won't exceed the present value of the benefits forgone.

If a plan provides for the commutation of the death benefit permitted under paragraph 8503(2)(e), it must also stipulate that the Minister’s approval must be received before the commuted amount may be transferred to an RPP, RRSP or RRIF. This approval will be considered on a case-by-case basis.

A member can name several beneficiaries for the guarantee portion of the member's benefit, but the beneficiaries cannot name other beneficiaries. The benefits payable to a beneficiary can be paid as continuing periodic payments or as a lump sum.

Grandfathered Plans:

Grandfathered plans are not subject to these restrictions until 1992.

Where we have registered a pension plan after March 27, 1988 that provided death benefits that do not comply with these conditions, any death benefits which commenced to be paid before 1992 are not affected by paragraph 8503(2)(n). However, the benefits must be acceptable to the Minister.

The condition on transfers to a RRIF applies only to payments made after April 5, 1994.

Cross References:

Undue Deferral of Payment – 8503(4)(d)

Rule for Commutation of Benefits – 8502(2.1)

9.18 8503(2.1) – Rule for Commutation of Benefits

Subsection 8503(2.1) of the Regulations contains a special rule in regards to the determination of the present value limit under paragraphs 8503(2)(m) and 8503(2)(n) for commuting benefits under a DB provision.

In determining the present value limits, subsection 8503(2.1) permits for any calculation date up to 2 years prior to the payment date. On condition that the earlier date is required under a provincial authority or it is reasonable based on accepted actuarial practices and the circumstances in which the member acquires the right to the payment.

Date Modified: 2008-05-15

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Important Notices