What are the disadvantages of DPSPs?

One of the disadvantages of a DPSP is that it cannot be used for emergencies since withdrawal before completion of the vesting period is not permitted, unless the employer makes exceptions. Contributions to DPSP are equal to pension adjustments and can potentially reduce overall pension income.

What are some advantages of a DPSP?

In addition to tax benefits, they are portable, have a short vesting period, and tie employee performance to profits, which creates an incentive for them to contribute to company success.

What are some legislative requirements of a DPSP?

Legislative requirements mandate that the plan’s funds cannot be invested in the stock, bonds, or debentures of the company responsible for the DPSP. Also, the plan’s funds cannot be used to give loans. The plan’s trustees, who are responsible for administering the plan and disbursing its funds, should be Canadian organizations. Beneficiaries of the plan can receive annuities of 15 years or less after they turn 71.

Deferred Profit-Sharing Plans (DPSP) | Definition, Pros & Cons

Deferred profit sharing plans are employer-sponsored profit sharing plans in Canada that combine elements of retirement plans and pensions.

They are similar to traditional profit-sharing plans and offer significant tax benefits for employers and employees.

They are often used to retain senior executives by tying their performance to company profits.

DPSPs are similar to traditional profit sharing plans because they help enable companies to share profits with employees.

However, regular profit sharing plan contributions made to an employee’s account are taxed as ordinary income tax.

DPSP contributions are tax-deductible for both employers and employees, meaning the amount contributed to a DPSP account is deducted before tax calculations.

DPSPs are put into accounts resembling tax accounts, where they are allowed to grow in a tax-deferred manner.

DPSPs have a maximum vesting period of two years in which ownership of the accounts is transferred to the employee.

A company must be registered with the Canada Revenue Agency (CRA) as a DPSP and must meet criteria related to contribution limits in order to obtain tax benefits for employers and employees.

DPSP contribution limits are the lesser of either half of the annual money purchase plan (MP) limit for that year or 18% of the employee’s annual salary for that year.

The MP limit for 2023 is $15,780 and for 2024, it is $16,245.

DPSP contributions also count towards Registered Retirement Savings Plan (RRSP) and act as pension adjustments.

Therefore, if an employer makes a DPSP contribution of $1,000 then the same amount is deducted from their RRSP plan.

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What Are the Requirements to Register for a DPSP?

There are two sets of requirements – legislative and administrative – for a deferred profit sharing plan.

Some of the legislative requirements are as follows:

The plan’s funds cannot be invested in the stock, bonds, debentures of the company responsible for the DPSP.

The plan’s funds cannot be used to give loans.

The plan’s trustees, who are responsible for administering the plan and disbursing its funds, should be Canadian organizations.

Beneficiaries of the plan can receive annuities of 15 years or less after they turn 71.

The following people cannot be beneficiaries of the plan:

Relatives of employers

Relatives of shareholders of corporation

Relatives of beneficiaries, if the employer is a trust responsible for the plan.

Some of the administrative requirements for DPSPs are as follows:

Beneficiaries cannot be divested from the plan, if they are fired or members of unions.

Trustees of the plan can only receive short-term loans against the trust’s funds.

Employee contributions made before 1991 should be fully vested in their name; contributions from employees after 1991 are not allowed, except in cases of funds transfer between two DPSP accounts.