Registered Plans Directorate technical manual

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• 19 8515 & 8516 – Special Rules for Designated Plans & Eligible Contributions
• 19.1 8515(1) – Designated Plan
• 19.2 8515(2) – Designated Plan in Previous Year
• 19.3 8515(3) – Exceptions
• 19.4 8515(4) – Specified Individual
• 19.5 8515(5) – Eligible Contributions
• 19.6 8515(6) – Funding Restriction
• 19.7 8515(7) – Maximum Funding Valuation
• 19.8 8515(9)- Member Contributions
• 19.9 8516(1) – Prescribed Contribution
• 19.10 8516(2) – Funding on Termination Basis
• 19.11 8516(3) – Contributions Required by Pension Benefits Legislation

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19 8515 & 8516 – Special Rules for Designated Plans & Eligible Contributions

19.1 8515(1) – Designated Plan

Form T510, Application for Registration of a Pension Plan and Form T244, Annual Information Return, will indicate whether or not the plan is designated. Once a plan has designated plan status, it continues in that status unless the Minister changes its status under the authority of subsection 8515(2) of the Regulations.

The fact that a plan is a designated plan has no impact on the plan terms itself, except where the plan allows members to buy past service. In that case, the plan must state that such contributions are subject to the approval of Agency. Designated plan status impacts the funding.

The category of designated plans is intended to apply to certain DB plans that are likely, by their nature, to be generously funded. Plans for executives and for connected persons are plans that would normally tend to be funded on a more generous basis than plans for low earners.

The designated plan rules are in place to restrict the funding of such plans. Subsections 8515(6) and (7) in effect mean that the employer contributions for active members can be no higher than what would be required using the set of assumptions given. They do not require that those specific assumptions be used, only that the contributions required as a result of the actual valuation performed not be higher than those which would be required if the specific assumptions were used.

Some of the funding restrictions under subsections 8515(6) and 8515(7) only apply with respect to restricted funding members, as defined in subsection 8515(8). These assumptions do not apply to members who terminated their employment and whose only entitlement is a lump-sum payment from the plan or those who are in receipt of pension benefits. For plans covering one or more retired members and at least one restricted-funding member, a waiver of the designated plan status is not available. However, certain assumptions outlined under section 8515 are no longer applicable to the retired members in receipt of pension. For example, the assumptions outlined in paragraph 8515(7)(e) are no longer used and the valuation should be performed based on the actual age of the member and his or her spouse (if applicable). In addition: the mortality rates to be used in the valuation fall under subparagraph 8515(7)(f)(ii); it is no longer required to assume the benefit is payable monthly in advance; benefits could be adjusted for cost of living increases after retirement at the full CPI rate of 4 % insofar as it is provided for under the plan terms; and the actual optional form chosen by the retiree should be valued.

However, the plan itself continues to be a designated plan and all other funding restrictions found in subsections 8515(6) and (7) continue to apply, unless the Minister has waived in writing the designated status of the plan.

The Minister of National Revenue may grant an exemption of the application of subsection 8515(2) of the Regulations when it is determined that the RPP is unlikely to become a designated plan in the future under subsection 8515(1) of the Regulations. We have determined that this requirement is considered to be met for a year in which no more pension credits accrue under a defined benefit provision of the RPP and there are no more restricted-funding members under the provision.

19.2 8515(2) – Designated Plan in Previous Year

The basic rule is that once a plan meets the designated plan definition, it continues to have designated plan status unless the Minister waives its continuing application.

For example, in 1993, 52 % of the pension credits under a plan were in respect of specified individuals. In 1994, only 48 % of the pension credits were in respect of specified individuals. Subsection 8515(2) of the Regulations specify that the plan will continue to be a designated plan for 1994 and subsequent years, even though less than half of the pension credits are in respect of specified individuals.

Ministerial waivers of the status for subsequent years will only be given where it appears likely that the plan will not meet the designated plan definition based on pension credits in the future. Normally, specific plan circumstances should exist to lead us to this conclusion. Examples of such circumstances are the addition of a category of employees to plan membership or the splitting off of the specified individuals into a separate plan.

19.3 8515(3) – Exceptions

Subsection 8515(3) of the Regulations provides that the Minister may give notice to the administrator that a plan is not a designated plan as long as:

The notice pursuant to subsection 8515(3)(e) that a plan is not a designated plan is given for one or more years as long as the terms of the plan and the facts remain the same as those existing at the time of the request. Should there be a material change in the terms of the plan or the facts in a year subsequent to the time of the request, a new request for a notice must be submitted for our consideration.

The plan administrator must certify that the conditions in (a) and (c) have been met, and provide us with the necessary information to determine if the conditions in (b) have been met before approval of the exemption is granted.

The following conditions have to be met for a plan to be considered a "normal" DB plan:

These conditions will normally indicate situations where benefits may be subject to the plan's financial performance. However, even if these conditions are not met, the plan may still qualify for the exemption. For example, the following situations would be acceptable:

• different benefit formulas for different classes of employees, eg, a more generous formula for senior executives;
• a member or group of members determining the contributions to be made to the plan, as long as the contributions are determined on the same basis for all members; and
• a member or group of members determining how the plan assets as a whole are to be invested. A member may not, however, have control over the investment of a portion of the assets.

If there are still some concerns as to whether the plan is a "normal" plan after consideration of the situations outlined above, the following questions could be asked for further clarification:

19.4 8515(4) – Specified Individual

An individual is considered to be a “specified individual” in a calendar year if they are connected at any time with a participating employer under the plan or the individual’s total remuneration for the year exceeds 2½ times the YMPE for the year.

Cross Reference:

Newsletter No. 94-2, Technical Questions and Answers

19.5 8515(5) – Eligible Contributions

Grandfathered Plans:

The funding restrictions are applicable with respect to contributions made after 1991 to an RPP that was registered before July 31, 1991.

They are applicable with respect to contributions made after 1990 to an RPP that was registered after July 30, 1991.

19.6 8515(6) – Funding Restriction

The April 5, 1994 Department of Finance Press Release announced that a new paragraph 8515(6)(a.1) is being added to the Regulations. The new provision prevents an employer from maximizing contributions to a designated plan by assuming that retirement benefits would be payable annually in advance. The announced change will place an additional limit on the assumptions that made be used to determine employer contributions to a designated plan.

The new requirement applies to contributions made 60 days after April 5, 1994, except when contributions are made pursuant to a valuation report that was filed within 60 days of April 5, 1994. Valuation reports that are received by the Directorate on or after June 6, 1994 will have to use the new assumption that retirement benefits are payable monthly in advance. Valuation reports that have been received by the Directorate before June 6, 1994 do not have to contain this new assumption and the recommendations contained in the valuation report can be approved even though they are not based on the new assumption. The date received will be the date postmarked on the envelope containing a valuation report or the date given to a courier service.

Paragraph 8515(6)(e) of the Regulations permits a certain portion of a surplus to be disregarded when determining required contributions to a designated plan. The rule is identical to the basic surplus test in paragraph 147.2(2)(d). In determining the amount of surplus that may be ignored, use the liabilities and current service contributions from the valuation on which the actuary's recommendation is (or has to be) based to determine the eligible contribution under subsection 147.2(2) of the Act in compliance with section 8515 of the Regulations. If the actuarial report contains a regular valuation and a maximum funding valuation, and the contributions determined under the regular valuation are larger than the amounts provided in the maximum funding valuation, see example 2, the actuary's recommendation has to be based on the maximum funding valuation.

Example 1

A valuation of the plan as of January 1, 1997 reveals the following:

	Regular Funding Valuation	Maximum Funding Valuation
Assets	$260,000	$260,000
Liabilities	230,000	285,000
Unfunded Liabilities (Surplus)	(30,000)	25,000
Current service contributions	12,000	14,000

The actuary recommends employer contributions of $12,000 in each of the years from 1997 to 1999 inclusive to adequately fund benefits. An excess surplus of $6,000 is determined from the Regular Funding Valuation. Therefore, the employer cannot make contributions until the excess surplus is eliminated.

Example 2

A valuation of the plan as of January 1, 1997 reveals the following:

	Regular Funding Valuation	Maximum Funding Valuation
Assets	$290,000	$290,000
Liabilities	270,000	240,000
Unfunded Liabilities (Surplus)	(20,000)	(50,000)
Current service contributions	20,000	18,000

The actuary recommends employer contributions of $18,000 in each of the years from 1997 to 1999 inclusive to adequately fund benefits. An excess surplus of $14,000 is determined from the Maximum Funding Valuation. Therefore, the employer cannot make contributions until the excess surplus is eliminated.

19.7 8515(7) – Maximum Funding Valuation

8515(7)(e)(i)

The April 5, 1994 Department of Finance Press Release announced that the requirement to assume that retirement benefits are to commence to be paid on the later of the date of the valuation report and the member's 65th birthday was being changed. This change will allow employer contributions to be made on the assumption that the member will continue to accrue benefits after age 65. Valuation reports that recommend contributions in respect of benefit accruals after age 65 can be approved.

8517(7)(f)

The April 5, 1994 Department of Finance Press Release announced that the requirement to assume that the rate of mortality at any age be assumed to be 80 % of the male/female rates set out in the 1983 Group Annuity Mortality Tables (GAM 83) is being amended. The changes require employer contributions to be determined on the assumption that the mortality rate will be 80 % of the rate set out in the GAM 83 for persons of the same sex as the member.

For females this new assumptions can be used in a valuation with effect from the date the plan was subject to the designated plan funding rules.

For males this new assumption is to be used in determining contributions that are to be made more than 60 days after April 5, 1994, except when contributions are made pursuant to a valuation report that was filed within 60 days of April 5, 1994. Valuation reports that are received by the Directorate on or after June 6, 1994 will have to use the new assumption requirements. Valuation reports that have been received by RPD before June 6, 1994 do not have to contain this new assumption and the recommendations contained in the valuation report can be approved even though they are not based on the new assumption. The date received will be the date postmarked on the envelope containing a valuation report or the date given to a courier service.

19.8 8515(9)- Member Contributions

This is essentially an anti-avoidance rule designed to require the application of the designated plan funding assumptions for both employer and employee past service contributions. Employee past service contributions must therefore be based on an actuarial valuation report, approved by the Agency, using the designated plan funding assumptions.

Plan Text:

Where a designated plan provides that a member may contribute to purchase past service, we will require that the plan wording reflect the fact that such contributions are subject to the approval of the Agency.

19.9 8516(1) – Prescribed Contribution

These rules are relieving provisions and allow a contribution that would not be an eligible contribution under subsection 147.2(2) of the Act to be considered an eligible contribution if the contribution satisfies one of the rules in this section of the Regulations. The rules in subsections 8516(2) through to 8516(4) apply to contributions made before 1995. The rules set out in subsections 8516(2) and (3) remain in effect for taxation years after 1990.

Subsection 8516(2) and (3) do not apply to employer contributions that are subject to the maximum funding limits for designated plans as set out in section 8515 of the Regulations. However, this does not mean that contributions to a designated plan cannot be determined on a termination or solvency basis. The rules in this section simply cannot be used to relieve the rules or conditions set out in section 8515 that govern designated plan funding.

19.10 8516(2) – Funding on Termination Basis

This rule allows an employer to make a contribution on a termination basis, sometimes called a "wind-up basis". Contributions made on a termination basis are prescribed contributions and are eligible contributions for purposes of subsection 147.2(2) of the Act and permissible contributions for the purposes of paragraph 8502(b) of the Regulations.

A termination basis is different from a solvency basis. Contributions made on a solvency basis are contributions that are required to be made under a federal or provincial pension benefits legislation. Subsection 8516(3) of the Regulations sets out the conditions for solvency based prescribed contributions.

Contributions required to provide promised benefits in respect of past, current, and future service can be determined on a termination basis. Contributions can also be made on a termination basis for past service and on a going-concern basis for current and future service.

The contributions in each case must be required to fully fund the plan on one or the other of the basis used. The conditions set out in paragraphs 8516(2)(a) through to (d) has to be satisfied before the contributions can be considered as eligible contributions. The condition in paragraph 8516(2)(d) stipulates that at the time the contribution was made, the plan is not a designated plan.

Example 1

An actuarial valuation report is submitted that values the past; current and future service liabilities on a going-concern basis and on a termination basis. The assets are valued at their fair market value as at the date of the valuation report. On the going concern basis there is an excess surplus however, on the termination basis there is no excess surplus. We would accept the termination basis and approve employer contributions on this basis while disregarding the excess surplus that exists on the going-concern basis.

Example 2

An actuary can use a termination basis to determine the past service contributions and a going-concern basis to determine the current (normal) and future service contributions or the reverse can be done. Contributions made on each actuarial funding basis will only be considered eligible contributions if they are required to be made having regard for the contributions previously made.

19.11 8516(3) – Contributions Required by Pension Benefits Legislation

Employer contributions are eligible contributions if determined on a solvency basis mandated under the Pension Benefit Standards Act or similar law of a province. The PBSA or similar provincial law must clearly mandate that certain retirement benefits must be assumed to be provided or certain assumptions must be used before the contributions can be considered eligible contributions. Also the conditions set out in paragraphs 8516(3)(a) through to (d) have to be satisfied before the contributions can be considered eligible contributions.

Generally, a solvency basis assumes that a plan is terminating or winding-up as at the effective date of the valuation report. However, unlike a termination basis, a solvency basis requires that certain retirement benefits be assumed to be provided (e.g. growing-in for early retirement) and/or that certain assumptions be used (e.g. salary projection or pre-retirement indexing) in determining the required contributions to be made. The retirement benefits that are assumed to be provided and/or the assumptions that must be used to determine the required contributions must be mandated under a pension benefits legislation. These mandate funding requirements can vary between the various pension benefits legislations. Only the pension benefits legislation requirements that govern a particular plan can be used for the purpose of the solvency basis. Also it must be clear that the solvency basis is mandated under the pension benefits legislation and not simply a general guideline of the pension supervisory authority.

Example 1

A plan that is registered under the Alberta pension benefits legislation cannot use the mandated contribution requirements set out under Quebec's pension benefits legislation. Only those conditions mandated by under the Alberta legislation can be used or applied in determining the contribution.