Deferred Profit Sharing Plan
A (DPSP) is an arrangement similar to a Defined Contribution Pension Plan (DCPP) whereby an employer distributes a portion of pre-tax profits to selected employees.
The pension amount is not known in advance and is determined by the amount of contributions, investment returns and annuity and interest rates at the plan member’s retirement. In contrast to a DCPP, plan members cannot make contributions and the employer’s contribution is dependent on company profits. Employers may contribute an amount no greater than 9% of the employee’s earnings for the current calendar year to the maximum contribution limit (half of the Registered Pension Plan maximum). The employer’s contributions are a tax deductible expense and are not a taxable benefit to the plan member.
Advantages of a Deferred Profit Sharing Plan:
- Easy to communicate and administer;
- Contributions are tax deductible to the employer;
- Contributions are not taxable to the plan member;
- Employer contributions are not subject to EI and CPP/QPP deductions;
- Tax deferred returns on investments;
- Fewer problems over future funding, over-funding, or plan surplus;
- Provides plan members a direct interest in company profitability;
- Employer expenses are reduced when the company is not profitable.
Disadvantages of a Deferred Profit Sharing Plan:
- Employee contributions not permitted;
- Contributions or plan can be cancelled at any time by employer (disadvantage to employee);
- Contributions by employer are unpredictable:
- Benefit is not guaranteed;
- Benefit for older employees may be smaller as compared to a Defined Benefit Plan due to reduced investment time.