Registered Plans Directorate technical manual

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• 15 8507 & 8508 – Periods of Reduced Pay & Salary Deferral Leave Plan
• 15.1 8507(1) – Prescribed Compensation
• 15.2 8507(2) – Additional Compensation in Respect of Qualifying Period
• 15.3 8507(3) – Qualifying Periods and Periods of Parenting
• 15.3.1 8507(3)(a) – Qualifying Period
• 15.3.2 8507(3)(b) – Period of Parenting
• 15.4 8507(4) – Cumulative Additional Compensation Fraction
• 15.5 8507(5) – Additional Compensation Fraction
• 15.6 8507(6) – Exclusion of Subperiods
• 15.7 8507(7) – Complete Period of Reduced Pay
• 15.8 8508 – Salary Deferral Leave Plan

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15 8507 & 8508 – Periods of Reduced Pay & Salary Deferral Leave Plan

Section 8507 of the Regulations contains rules that enable DB benefits to be provided, or MP contributions to be made, in respect of a period of disability, a leave of absence or a period of reduced pay as if it were a regular period of employment without violating the PA limits in subsections 147.1(8) and (9) of the Act.

Subsections 147.1(8) and (9) require that PAs not exceed specified limits, including limits that depend on compensation. Compensation is defined by subsection 147.1(1) and includes prescribed amounts. This is to allow a notional amount of remuneration to be included in respect of periods when an individual's remuneration is reduced because the individual is disabled, on leave of absence or rendering services on less than a regular basis. The inclusion of such amounts in compensation enables benefits to accrue under a DB provision (or contributions to be made under a MP provision) as if the individual had not had a reduction in remuneration, without violating the PA limits in subsections 147.1(8) and (9).

A plan administrator is allowed to:

• Bank the member’s working hours in years when the member works more than the full time equivalent; and
• Debit the banked hours in a year when the member works less than the full time equivalent.

The plan can debit the hourbank for increased benefits. Debiting an hourbank is allowed in two situations. The two situations are debiting the hourbank on an on-going basis and debiting the hourbank in the year of termination. A combination of the two is acceptable.

Debiting the Hourbank on an On-going Basis

Debiting the hourbank on an on-going basis is allowed if the following conditions are met in the plan text:

1. The debited hours are used to provide current service;

2. The debited hours are qualifying periods under paragraph 8507(3)(a) and for periods of disability; and

3. The amount of prescribed compensation for qualifying periods is limited by the prescribed compensation rules of section 8507 of the Regulations.

Debiting the Hourbank in the year of termination

Debiting the hourbank in the year of termination is also acceptable and would involve the following steps;

The above steps must be detailed in the plan text.

The debiting of the hourbank in the year of termination does not increase the number of years of pensionable service. Instead, the debiting of the hourbank increases the benefit accrual rate or the flat benefit rate. For instance, before the member terminates, the benefit accrual rate might be 1.5%. After the member terminates, the hourbank is debited and the accrual rate is recalculated at 1.8%. In no way does the debiting of the hourbank affect the number of years of pensionable service. After the hourbank is debited, the benefit accrual is still tested against the maximums of section 8504 of the Regulations.

15.1 8507(1) – Prescribed Compensation

This subsection prescribes specific amounts that are to be included in the compensation of an individual for a particular year from an employer. They are:

• For an eligible period of reduced pay or temporary absence in the year, the amount determined in subsection 8507(2);
• For a period of disability in the year, a reasonable amount determined to be the remuneration for the period from the employer if the individual had not been disabled less the actual remuneration from the employer.

Plan Text:

The prescribed compensation restricts current service accruals only. Past service purchases of leaves of absence are restricted only by PSPA, which would be certifiable, and therefore subject to the individual's having sufficient RRSP room to support it.

We will not question amendments allowing for pension benefits for employees affected by a wage rollback to be calculated on their original salary.

Cross References:

Definition of “Eligible Periods of Reduced Pay” – 8500(1)

Definition of “Eligible Periods of Temporary Absence” – 8500(1)

Definition of “Periods of Disability” – 8500(1)

Qualifying Periods – 8507(3)

15.2 8507(2) – Additional Compensation in Respect of Qualifying Period

This subsection contains the rules for determining the amount that is prescribed by subsection 8507(1) of the Regulations in respect of a qualifying period of an individual in a year with respect to an employer.

The amount represents a reasonable estimate of the additional remuneration that the individual would have earned had he or she rendered services to the employer on a regular basis throughout the period. A reasonable amount would be determined based on the conditions of the individual's employment contract immediately prior to the qualifying period. An amount determined without regard to the services rendered or remuneration received by the individual prior to the qualifying period would not meet the reasonableness test under paragraph 8507(2)(a).

For example, a plan which provides for the deeming of earnings based on the highest paid position that the member could have attained during the qualifying period would not meet the reasonableness test, as it is unlikely that the member's earnings would have been that high had the member rendered services on a regular basis during the period.

Cross Reference:

Complete Period of Reduced Pay – 8507(7)

15.3 8507(3) – Qualifying Periods and Periods of Parenting

15.3.1 8507(3)(a) – Qualifying Period

Reference to contributions under a MP provision includes:

• Forfeitures and earnings on forfeitures;
• Surplus and earnings on surplus, that have been allocated to the member.

A period in a calendar year for a member in respect of an employer is a qualifying period if:

• The period is a pensionable period of reduced pay or pensionable period of temporary absence (neither of which is available to connected persons after 1990);
• Contributions are made under a MP provision, or LRBs accrue under a DB provision, on a current service basis for the period;
• The contributions made under the MP provision, or the LRBs that accrued under the DB provision, for the period exceed those that would have been made/accrued if they had been based on the actual remuneration earned and actual service rendered by the member;
• The member's PA for the year includes the amount contributed or the value of the DB accrued for the period; and
• No contributions are made, and no benefits are provided, for the period under an RPP or DPSP in which the employer does not participate. For example, if, during a leave of absence, an employee works for another employer, the employee can accrue benefits under one or the other plan, but not both. This condition does not apply to forfeitures, earnings on forfeitures, surplus or earnings on surplus that were allocated to the member on or before April 5, 1994.

Paragraph 8507(3)(a) is amended to exclude, through new subparagraph (vii), any period after the time that the individual commenced to receive bridging benefits, or to accrue additional benefits, under circumstances to which new subsection 8503(17) or (19) applied. These provisions enable a defined benefit RPP to provide for qualifying employees to receive bridging benefits on a stand-alone basis or to receive up to 60 per cent of their accrued pension while continuing to accrue additional benefits. The amendment to paragraph 8507(3)(a) ensures that compensation cannot be prescribed for individuals who have benefited from these new provisions.[Footnote 1]

This amendment applies to the 2008 and subsequent calendar years.[Footnote 1]

In the determination of prescribed compensation, a qualifying period is usually in addition to a period of parenting. However, it can also include a period of parenting. This means that if the member uses up the three-year allotment for periods of parenting, additional periods of parenting can be applied against the five-year allotment for qualifying periods.

SMEPs:

The condition that contributions be made or LRBs accrue on a current service basis does not apply to SMEPs.

Cross Reference:

Deems Allocated Forfeitures and Surplus – 8500(7)

15.3.2 8507(3)(b) – Period of Parenting

This is all or part of the period that starts at the time of the birth or adoption of a child and ends 12 months later. In the determination of prescribed compensation, a period of parenting can be a stand-alone period or can be included in a qualifying period. For more information, see paragraph 8507(3)(a) – Qualifying Periods.

15.4 8507(4) – Cumulative Additional Compensation Fraction

This subsection along with paragraph 8507(2)(b) of the Regulations, limits the total of the amounts that will be prescribed in respect of an individual's qualifying periods.

The fact that compensation may be prescribed after 1990 means that it is possible for members to have accrued pensionable service for leaves of absence or reduced pay before 1991 and still be entitled to 5 years (plus 3 for parenting) of prescribed compensation after 1990.

The limit of 5 years (+ 3) of prescribed compensation includes compensation deemed for a leave of absence with the employer, non-arm's length employers and other participating employers. It does not necessarily apply to one employer in isolation.

Grandfathered Plans:

The prescribed compensation rules exist to allow unpaid service to accrue without causing the PA limits to be exceeded. As a result, the prescribed compensation rules will take effect in the same year as the PA limits. For those plans that are not affected by the PA limits until 1992, the prescribed compensation rules will only apply commencing in 1992.

15.5 8507(5) – Additional Compensation Fraction

Subsection 8507(5) of the Regulations permits a special calculation of the additional compensation fraction to ensure that the 5-year limit on prescribed compensation is not used up by a period of loan under certain circumstances. Possible scenarios include:

• If the employer and the prescribed employer deal with each other at arm’s length, and such has been certified, in writing, by the plan administrator, the 5-year limit on prescribed compensation is not used up by the period of loan;
• If the employer and prescribed employer are related, the period of loan would use up the member’s 5-year allotment of prescribed compensation.

15.6 8507(6) – Exclusion of Subperiods

Subsection 8507(6) specifies that qualifying periods in a year under section 8507 of the Regulations do not include subperiods of those qualifying periods.

15.7 8507(7) – Complete Period of Reduced Pay

For the purposes of subsection 8507(2) of the Regulations, subsection 8507(7) defines a complete period of reduced pay to be a period that consists of one or more periods of:

• Periods of disability of the member, and
• Eligible periods of reduced pay or temporary absence with respect to the employer.

15.8 8508 – Salary Deferral Leave Plan

By treating all of the years involved in a salary deferral plan, i.e. the years during which salary is deferred and the years during which the member is on leave of absence, the following rules apply:

• For purposes of the maximum, members are deemed to have worked at their regular rate of pay and regular time basis throughout the salary deferral period and the leave period (paragraph 8504(4)(d))
• Members may contribute the amounts necessary to fund the benefits accrued in respect of deemed remuneration and deemed service (paragraph 8503(4)(a)).

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Footnote

[Footnote 1]
Addition made on June 20, 2008.