Registered Plans Directorate technical manual

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• 14 8506 – Money Purchase Provisions
• 14.1 8506(1) – Permissible Benefits
• 14.1.1 8506(1)(a) – Lifetime Retirement Benefits
• 14.1.2 8506(1)(b) – Bridging Benefits
• 14.1.3 8506(1)(c) – Guarantee Period
• 14.1.4 8506(1)(d) – Post-retirement Survivor Benefits
• 14.1.5 8506(1)(e) – Pre-retirement Survivor Benefits
• 14.1.6 8506(1)(e.1) – Variable Benefits
• 14.1.7 8506(1)(f) – Payment from Account
• 14.1.8 8506(1)(g) – Payments from Account After Death
• 14.1.9 8506(1)(h) – Commutation of Benefits
• 14.1.10 8506(1)(i) – Commutation of Benefits After Death
• 14.2 8506(2) – Additional Conditions
• 14.2.1 8506(2)(a) – Employer Contributions Acceptable to the Minister
• 14.2.2 8506(2)(b) – Employer Contributions with Respect to Particular Members
• 14.2.3 8506(2)(b.1) – Allocation of Employer Contributions
• 14.2.4 8506(2)(c) – Employer Contributions not Permitted
• 14.2.5 8506(2)(c.1) – Contributions not Permitted
• 14.2.6 8506(2)(d) – Return of Contributions
• 14.2.7 8506(2)(e) – Allocation of Earnings
• 14.2.8 8506(2)(f) – Payment or Reallocation of Forfeited Amounts
• 14.2.9 8506(2)(g) – Retirement Benefits
• 14.2.10 8506(2)(h) – Undue Deferral of Payment – Death of the Member
• 14.2.11 8506(2)(i) –Undue Deferral of Payment – Death of a Specified Beneficiary
• 14.3 8506(2.1) – Alternative Method for Allocating Employer Contributions
• 14.4 8506(3) – Reallocation of Forfeitures
• 14.5 8506(4) – Non-Payment of Minimum Amount – Plan Revocable
• 14.6 8506(5) – Minimum Amount
• 14.7 8506(6) – When the Minimum Amount is Nil
• 14.8 8506(7) – Specified Beneficiary

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14 8506 – Money Purchase Provisions

14.1 8506(1) – Permissible Benefits

14.1.1 8506(1)(a) – Lifetime Retirement Benefits

The LRBs have to be paid in equal, period amounts. Exceptions to this general rule are as follows:

14.1.2 8506(1)(b) – Bridging Benefits

If bridging benefits are provided, the plan must state that they will cease no later than the end of the month following the month in which the member turns 65. The plan may provide for the bridge to cease earlier than age 65. There is no limit on the size of the bridge, since it may only be provided to the extent that the LRBs are reduced. Assuming the entire plan satisfied the primary purpose test, it is conceivable that a member could forego all LRBs to receive a bridging benefit. These benefits may also be commuted.

Section 91.1 of the Supplemental Pension Plans Act (SPPA) of the Province of Quebec provides to a member or spouse or common-law partner the right on retirement to replace, in whole or in part, the life pension accrued, by a temporary pension not exceeding 40% of the YMPE of the year in which the payment of the pension begins. This benefit is similar to the bridging benefit permitted under the Act.

Cross Reference:

Newsletter No. 94-2, Technical Questions and Answers

14.1.3 8506(1)(c) – Guarantee Period

If the plan provides for a guarantee period, it must not provide for a guarantee period in excess of the maximum permitted. The maximum acceptable guarantee period is 15 years from the date the member's pension commences. Should the member die before the expiration of the guarantee period, the pension payments may continue to be paid to one or more beneficiaries until the end of the guarantee period. Alternatively, the remaining payments may be commuted and paid to the beneficiaries in a lump sum. Only the spouse or former spouse may transfer this commuted value to his or her own RRSP or RPP.

After 2003, any variable benefits (new paragraph 8506(1)(e.1)) that have been paid to the member are not included in the calculation of the remaining guarantee payments that can be made to the beneficiaries.

14.1.4 8506(1)(d) – Post-retirement Survivor Benefits

A plan may provide that if the member dies after pension payments commence, the member's spouse or common-law partner, or former spouse or common-law partner may elect to receive a pension for life. The benefit payable to the spouse may be equal to 100% of what the member was getting. This survivor pension plus any benefits paid to beneficiaries under a guarantee period option may not exceed what the member would have received had the member lived. The plan may also permit the spouse/former spouse, common-law partner or former common-law partner to receive a lump sum payment or to transfer the amount to his or her own RRSP or RPP.

After 2003, any variable benefits (new paragraph 8506(1)(e.1)) that have been paid to the member are not included in the calculation of the remaining guarantee payments that can be made to the beneficiaries.

14.1.5 8506(1)(e) – Pre-retirement Survivor Benefits

A plan may provide that if the member dies before retirement, the spouse/former spouse, common-law partner or former common-law partner may receive a pension for life that starts no later than the end of the year in which the spouse turns age 71 or no later than one year after the member's death if the spouse is 71 or older when the member dies. The pension payments may be permitted to be adjusted in the same manner as the member's could have been (equal or varying payments). Bridging benefits may also be payable if the spouse or common-law partner is under age 65, and the payments may be guaranteed for 15 years from when they start.

Alternatively, the plan may permit the spouse, common-law partner or former spouse or common-law partner to elect a lump sum payment. They may transfer the commuted value of the benefit. If someone other than the member's spouse, common-law partner or former spouse or common-law partner is the beneficiary, they may only receive a non-transferable lump sum payment.

Cross Reference:

Payment of Pension – 8502(e)

14.1.6 8506(1)(e.1) – Variable Benefits

After 2003, a money purchase provision will be permitted to pay funds directly from the member’s account under the provision. New paragraph 8506(1)(e.1) requires a minimum amount that must be paid to the member and beneficiaries of the member for the year. The method for determining the variable benefit for the year is similar to the calculation of the minimum amount from a RRIF.

14.1.7 8506(1)(f) – Payment from Account

Payment of a lump sum amount can be made from a MP provision as long as the lump sum does not exceed the balance in the member's account. This applies whether the provision relates to required contributions or to additional voluntary contributions. There are no conditions restricting these payments.

The plan may allow lump sum withdrawals from the member's account at any time. This will accommodate a payment to the spouse or common-law partner on the breakdown or marriage or partnership, lump sum withdrawals on termination of employment or termination of the plan.

If the plan provides for it, members may commute both pre-reform and post-reform benefits before terminating employment. Commutation of benefits that have begun to be paid is also permissible.

The requirement under paragraph 9(b) of Information Circular 72-13R8, Employees’ Pension Plans, for locking-in of pre-reform benefits that were transferred to a RRSP on retirement no longer applies.

Cross Reference:

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

14.1.8 8506(1)(g) – Payments from Account After Death

The surviving spouse, common-law partner, former spouse or common-law partner may be permitted to take the benefit in the form of a lump sum payment instead of a pension. For other beneficiaries a lump sum payment on the death of the member is the only benefit permitted.

After 2003, paragraph 8506(1)(g) is amended to allow for funds to be paid out even if the member had commenced to receive payments from his account.

14.1.9 8506(1)(h) – Commutation of Benefits

The plan may allow for the member to receive a lump sum payment at or after retirement equal to the commuted value of the pension instead of lifetime retirement benefits. Certain provincial legislation dealing with locking-in and vesting restriction will probably limit, or not permit a member to receive a lump sum payment.

14.1.10 8506(1)(i) – Commutation of Benefits After Death

The plan may allow for the commutation of all or part of a beneficiary's entitlement to benefits under the plan after the member's death and for the commuted value to be paid out in a lump sum not to exceed the present value of those benefits that are being commuted.

This paragraph accommodates the commutation of the remaining guarantee payments under the guarantee period option to the member's beneficiary. It also provides for the lump sum payment to the spouse, common-law partner, former spouse or common-law partner under the post-retirement surviving spouse death benefits.

14.2 8506(2) – Additional Conditions

14.2.1 8506(2)(a) – Employer Contributions Acceptable to the Minister

1 % Minimum contributions

An acceptable manner for determining contributions includes what we allowed under Information Circular 72-13R8, such as a percentage of salary or remuneration or a specific dollar amount, or a combination of these determinations, e.g. $1,000 per year to a maximum of 5 % of remuneration.

Unacceptable determinations include a formula derived from the employer's profits for the year with no obligation to contribute the 1 % minimum employer contribution, referred to in paragraph 11(a)(ii) of Information Circular 72-13R8.

The 1 % minimum employer contribution rule is not needed under a combination plan where employer contributions are required to be made to the MP provision of the plan and plan members are also actively accruing benefits under the DB provision of the plan. However, where one or more plan members can opt out of the DB provision and continue to only participate under the MP provision then the 1 % minimum employer contribution rule is needed in respect of those members. A combination plan provides retirement benefits under both a MP and DB provision and members are required to participate under both provisions as a general condition of plan membership.

Contributions

Where a plan applies forfeitures to reduce the employer’s obligation to make contributions to the members accounts and where the forfeitures are sufficient to fully reduce the employer’s contributions, the employer will not be required to contribute the minimum 1 % employer contribution.

Plan Text:

Regardless of the determination, it must be clear from the plan text that the employer is required to contribute a minimum of 1 % of the total pensionable earnings paid to all active plan members. Additional voluntary contributions are made to a MP provision that is supplemental to another provision. The 1 % minimum does not apply to AVC provision because employers are not required to contribute to it.

We will accept plan terms that provide that the 1 % employer minimum contribution will be based on:

• earnings paid to both active and non-active plan members; or
• the pensionable earnings paid to active plan members.

If the plan terms are silent then we will assume that the 1 % employer minimum contribution is based on the remuneration paid to active plan members. This is the more generous position.

A MP provision under a combination plan has to contain the 1 % minimum employer contribution rule if plan members are allowed to only participate in the MP provision under the plan.

Cross References:

Maximum Employer Contributions – 147.1(8) & (9)

Information Circular 72-13R8, Employees’ Pension Plans

Newsletter No. 91-4R, Registration Rules for Money Purchase Provisions

14.2.2 8506(2)(b) – Employer Contributions with Respect to Particular Members

Ensure the plan states that a participating employer can only contribute amounts that are in respect of employees or former employees who are members of the plan. This requirement is designed to prevent unallocated contributions to the plan.

Cross Reference:

Allocation of Employer Contributions – 8506(2)(b.1)

14.2.3 8506(2)(b.1) – Allocation of Employer Contributions

Employer contributions made after April 5, 1994 have to be allocated to the member for whom it is made.

Cross Reference:

Alternative Method for Allocating Employer Contributions – 8506(2.1)

14.2.4 8506(2)(c) – Employer Contributions not Permitted

As long as there is a surplus or there are unallocated pre-1990 forfeitures or earnings related to the forfeitures, in a MP provision:

• employer cannot make contributions; and
• April 5, 1994, a DB surplus cannot be transferred, to the provision.

Plan Text:

A review of the plan will determine whether a DB provision has been converted to or replaced by a MP provision, and whether any DB surplus has been transferred for application against the employer's obligations for contributions under the MP provision. If such is the case, the plan must state that no contributions will be made until the surplus is used up.

Otherwise, the plan may be silent regarding employer contributions not being permitted under, or a DB surplus not being transferable to, a MP provision when there exists a surplus or unallocated pre-1990 forfeitures or related earnings under the provision.

Cross Reference:

Newsletter No. 94-2, Technical Questions and Answers

14.2.5 8506(2)(c.1) – Contributions not Permitted

Contributions or amounts transferred from another RPP are not permitted for a member after the calendar year in which he turns 71 years of age. This also includes any forfeited amounts or surplus that could be allocated to a member.

Only amounts transferred under 146.3(14.1), 147.3(1) and 147.3(4) of the Act would be permitted.

14.2.6 8506(2)(d) – Return of Contributions

MP plans, other than legislated plans, have to contain a stipulation that allows a contribution to be refunded to the contributor to avoid revocation of the plan. The stipulation can be qualified to make the refund subject to the approval of the authority administering the PBSA or PBA, as applicable.

Grandfathered Plans:

An existing plan is exempt from having to contain this stipulation.

Cross Reference:

Stipulation Not Required for Pre-1992 Plans – 8509(10.1)

14.2.7 8506(2)(e) – Allocation of Earnings

The earnings related to the MP provision's assets have to be allocated at least annually and on a reasonable basis to plan members.

Plan Text:

Plans must provide that the allocation of earnings is to be done at least annually. The plan does not specifically have to state that the allocation is to be done on a reasonable basis. A reasonable method is acceptable if it involves some form of proration (e.g. allocation of earnings on a basis that is proportionate to the amount in each member's account). If the method of allocation is not in the plan, it is often in the funding contract.

14.2.8 8506(2)(f) – Payment or Reallocation of Forfeited Amounts

This paragraph gives discretion to the Minister to extend the deadline for payment or reallocation of forfeitures and related earnings, within limits.

A plan's terms can specify when forfeiture occurs. The occurrence does not have to be on the date an employee terminates employment either fully or partially unvested. For example, in a seasonal labour environment, employees may regularly terminate employment at the end of one season and be called back to work at the beginning of another. In this case, a plan could provide that forfeiture occurs if the member is not recalled to work by a certain time.

Forfeitures and related earnings can be:

• in cash to the employer, the employer has to report the amount as taxable income;
• in cash to the members. Technically, the amount is reallocated to each member and then paid out of the member's account as a permissible benefit. The member has to report the amount as taxable income. The amount is not included in the member's pension credit if reallocation and payment occur in the same year;
• directly to another RPP, RRSP or RRIF of the members, or to another provision for the members. Technically, the amount is reallocated to each member and then transferred as a permissible benefit. If this were a payment to the member, it would be excluded from the member's pension credit. However, for pension credit purposes, subsection 8301(15) deems it not to be a payment. Therefore, the amount has to be included in each member's pension credit. Also, as a reallocation, it impacts on the amount that can otherwise be contributed to the plan;
• to the members' accounts. The amount is included in each member's pension credit and impacts on the amount that can otherwise be contributed to the plan.
• to reduce the employer's obligation to make contributions to the members' accounts. When a plan provides for this use, the effect is a reallocation to members' accounts. The amount is included in each member's pension credit and impacts on the aggregate contributions that can be made by both the employer and the member. It is not a contribution; it simply reduces and limits the amount an employer can contribute. Therefore, the existence of a surplus does not prevent the reallocation from being made; or
• to pay expenses of the plan. This use is permissible for all forfeitures and related earnings arising after April 5, 1994. For similar amounts that arose on or before April 5, 1994, payment of expenses is acceptable only if the amounts are unallocated on April 5, 1994.

Plan Text:

Plans must provide that any forfeited amounts and related earnings will be paid or reallocated by the end of the year following the year they arose.

Cross References:

Transfers – MP to MP, RRSP, RRIF or DB – 147.3(1) & (2)

Pension Credit – MP Provision – 8301(4)(b)

Transferred Amounts – 8301(15)

Permissible Distributions – 8502(d)

Transfer of Property Between Provisions – 8502(k)

Payment from Account – 8506(1)(f)

Reallocation of Forfeitures – 8506(3)(b)

14.2.9 8506(2)(g) – Retirement Benefits

Plans must state how the retirement benefits will be provided. Retirement benefits payable under a MP provision have to be provided by the purchase of an annuity from a licensed annuities provider.

Paragraph 8506(2)(g) does not apply to the variable benefits that are paid directly out of the member’s account under new paragraph 8506(1)(e.1).

We will no longer be allowing for other arrangements that are acceptable to the Minister. Plans that have been approved prior to February 27, 2004, will remain acceptable.

It is only the retirement benefits that have to be provided through an annuity - funding for a MP provision is not restricted to insurance contracts.

14.2.10 8506(2)(h) – Undue Deferral of Payment – Death of the Member

The legislation provides that any lump sum payments payable to a member's beneficiary be paid out as soon as practicable. Plans may use the wording of the legislation or be silent on this. If a time frame is mentioned, we will accept anything within one year as being practicable.

After 2003, funds may remain in the plan in order to pay benefits from the account to the specified beneficiary of the member, upon the death of the member.

14.2.11 8506(2)(i) –Undue Deferral of Payment – Death of a Specified Beneficiary

After 2003, any lump sum payments payable after the death of the specified beneficiary should be paid out as soon as practicable after their death.

Plans may use the wording of the legislation or be silent on this. If a time frame is mentioned, we will accept anything within one year as being practicable.

14.3 8506(2.1) – Alternative Method for Allocating Employer Contributions

The Minister may waive the requirement in paragraph 8506(2)(b.1) where each employer contribution made after April 5, 1994 is allocated to the member for whom it was made. The request for such a waiver must be made in writing by the plan administrator. Also, the manner in which the employer contributions are to be allocated must be acceptable to the Minister.

14.4 8506(3) – Reallocation of Forfeitures

The extension of the deadline imposed under paragraph 8506(2)(f) can only be granted when the forfeited amounts and related earnings are to be:

• Reallocated on a reasonable basis to the majority of plan members; or
• Used to pay expenses of the plan. The extension of time for this use can only apply where the forfeitures and related earnings arose after April 5, 1994 or, if they arose earlier, where the amounts remained unallocated on April 5, 1994.

The administrator must apply for an extension in writing and provide details of the unusual circumstances that led to abnormally high forfeitures and earnings.

14.5 8506(4) – Non-Payment of Minimum Amount – Plan Revocable

New subsection 8506(4) applies to plans that choose to directly pay variable benefits from the members’ account. If the minimum amount is not paid or is less than what is required to be paid to the member, the plan becomes revocable plan.

14.6 8506(5) – Minimum Amount

New subsection 8506(5) defines the minimum amount that must be paid to the member from their account. The calculation of the minimum amount is similar to how it is calculated under RRIFs. The minimum amount is determined by the formula A x B, where:

The payment schedule can be changed in situations were the marital status of the member has changed. For example, the member gets married after he started receiving benefits, and his spouse is younger, the designated factor can be based on the age of the new spouse.

Any amounts that were used to purchase an annuity or transferred out of the member’s account are not to be considered for purposes of determining the balance in their account.

14.7 8506(7) – When the Minimum Amount is Nil

New subsection 8506(7) of the Regulations is added to be consistent with the rules for RRSP and RRIF. The minimum amount does not have to be paid out of the plan until the year in which the member turns 72 years of age.

14.8 8506(8) – Specified Beneficiary

New subsection 8506(8) of the Regulations defines the term “specified beneficiary”. A specified beneficiary of a member is their surviving spouse or common-law partner. The plan administrator must be advised prior to the beginning of the year in order to be able to be designated as a specified beneficiary.

The specified beneficiary is entitled to continue to receive the variable benefits from the members’ account for the remainder of their life.