Human Resources

What is a Group RRSP and How Does It Work?

Paul Sharpe, CPA, CA
/
July 27, 2022

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This article will explain what employer group RRSP savings plans are, how they work and how to set up a plan for your employees.

What Is a Group RRSP and How Does It Work?

This article will explain what employer group registered retirement savings plans (RRSPs) are, how they work and how to set up a plan for your employees.

What Are Registered Retirement Savings Plans (RRSPs)?

First thing’s first, let’s look at what exactly a registered retirement savings plan (RRSP) is.  

An RRSP is a savings plan that is registered with the Canadian government that Canadians can use to save for retirement.  Plan holders contribute to the savings plan by depositing cash into the account or by transferring existing investments into the registered plan.  

Once the cash is deposited into the registered account, it can be used to purchase investments. These investments will hopefully grow and generate income to help save for retirement.

You might login to your account through a provider like WealthSimple or Scotiabank. You will see your cash and investment balances broken out between your “registered” account (your RRSP) and your “non-registered” account if you also have investments held outside of your RRSP.

RRSP is a Tax Advantaged Account

The benefit of an RRSP is that it is what’s called a “tax-advantaged” account. When the funds and investments that are held within the registered account earn income, there is no tax to be paid on that income.

This helps the investments grow at a quicker pace than if they were held outside of the RRSP account.

RRSP Contributions are Tax Deductible 

Contributions made into the RRSP account are deductible from the account holder’s taxable income (up to certain limits). 

For example, if David Rose earns $100,000 working at Rose Apothecary in 2022, he would usually have $100,000 of income that he has to pay tax on. If he also contributes $10,000 to his RRSP that year, he could deduct that $10k and would only need to pay tax on $90,000 of income.

These two benefits can really add up when saving for retirement.

RRSP Income is Taxable When Withdrawn

Once an account holder is ready to take money out of their RRSP account (typically after retirement), they can withdraw funds to be used elsewhere. When funds are taken out of the registered account, they become taxable income in the year of withdrawal.

For example, if David Rose retires in 2023 and no longer earns income from Rose Apothecary, he can withdraw funds from his RRSP to use in his everyday life.  If he takes out $50,000 from his RRSP in 2023, then he would have $50,000 in taxable income that year.

RRSPs can be a very useful tool for saving for retirement and employers can help their employees do this by creating a Group RRSP for their team.

What is a Group RRSP (Employer RRSP Matching)

A group RRSP may also be referred to as an employer RRSP matching plan.  We’ll use “group RRSP” in this article to keep it simple.

A group RRSP is a registered retirement savings plan that allows employees to have funds deducted directly from their paycheques and deposited into the account. 

It also allows employers to contribute to the RRSP, often matching the employee’s contribution.  This is typically referred to as employer RRSP matching.

It’s a great way for employers to help their employees save for retirement without having to manage a pension plan. It’s very useful for small to medium sized businesses that don’t have the resources to offer a full pension for their employees. 

We make use of a group RRSP here at Avalon as we’re not quite at the size to be able to offer a full pension plan. 

We had a full compensation review completed by our amazing HR advisors, Reimagine Work.

We learned about market-based compensation and found that retirement savings was a missing component from our compensation package. So, we went ahead and set up a group RRSP for our team.

How Does a Group RRSP Work?

A group RRSP works similarly to individual RRSPS in that the same rules apply:

  • Tax Deductible Contributions - Both the employee and the employer contributions are deductible from the employee’s taxable income.
  • Tax-free Income - Income earned within the RRSP is not taxed until it is withdrawn from the registered account by the account holder.
  • Contribution Limits - There are still annual contribution limits for the group RRSP. The employer and employee contributions combined must not exceed the annual limit.
  • Investment Restrictions - Only certain types of investments called qualified investments can be held within an RRSP.  It’s a pretty broad spectrum including shares in publicly owned companies, mutual funds and GICs to name a few. 

The main benefit about the group RRSP is that employers can contribute to the RRSP account directly. This contribution is tax deductible as a business expense for the employer. 

The employee also gets an RRSP contribution slip at the end of the year. This tax slip shows the total contributions that can be deducted from their taxable income.

Employers can choose a set amount to contribute to the employee’s group RRSP account each year.  Often this is a percentage of the employee’s total salary with 2% to 5% being a typical range.  

Alternatively, employers can match employee contributions up to a maximum dollar amount. 

Example 1 - Employer Contributes a Percentage of Salary

If Rose Apothecary states that they will contribute 2% of employee salary, then it doesn’t matter how much the employee contributes.  For example, if David Rose earns $100,000 and contributes $0, $300 or $3,000 in a given year, then Rose Apothecary still contributes 2% of his salary or $2,000.  The employer contribution doesn’t change in this scenario.

Example 2 - Employer RRSP Matching (up to a maximum)

In this example, Rose Apothecary matches employee contributions up to a set maximum of $2,500 per year. If David Rose contributes $2,500 to his RRSP in 2023, then his employer would also contribute $2,500. 

If David Rose contributed $3,000, his employer would only contribute the stated maximum of $2,500.

What are the Benefits of a Group RRSP?

Group RRSPs are a flexible way for businesses to help their employees save for retirement. Some of the benefits using a group RRSP plan are:

  • Reasonable Cost - Compared to offering employees a pension plan, setting up a group RRSP is a cost effective way to help employees save.
  • Tax Deductible for Employers - Contributions made by employers are deductible business expenses. 
  • Tax Deductible for Employees - The combined amount of contributions made by employees and employers is deductible from employees’ income up to a maximum amount per year.
  • Offer Competitive Employee Compensation - Group RRSPs allow smaller businesses to compete with larger companies when seeking talented employees. 
  • Help Employees Save - Allowing employees to contribute directly from their paycheques takes the guesswork out of saving. It also helps those who have a hard time saving. The cash never hits their personal bank account - it goes directly into the RRSP account.
  • Flexibility - Group RRSPs allow employers the flexibility to define the amount of contributions. They can match employee contributions up to a maximum amount or offer a set percentage of employee salaries.
  • Easy to Manage - Group RRSPs are easy to manage. Choose a provider and they handle all the heavy lifting for you. We’ve chosen Wealthsimple as they offer a user friendly interface and easy to understand investing model for employees.

How are Group RRSPs Taxed?

Group RRSPs are taxed in a similar manner to individual RRSPs. There is also the benefit that employer contributions are deductible business expenses.

  • Tax Deductible for Employers - Contributions made by employers are deductible business expenses. 
  • Tax Deductible for Employees - The total amount of contributions made by employees and employers is deductible from employees’ taxable income up to a maximum amount per year.
  • Tax-free Income for Account Holders - Income earned within the RRSP is not taxed until it is withdrawn from the registered account.
  • Taxed When Withdrawn from RRSP - When account holders withdraw funds from their RRSP, the amount is added to their taxable income in that year.
  • Borrow from Your RRSP for Buying a Home - Account holders can use the Home Buyers’ Plan to withdraw funds from their RRSP without paying tax on the withdrawal.
  • Borrow from Your RRSP to Go to School - Account holders can use the Lifelong Learning Plan to withdraw funds from their RRSP without paying tax on the withdrawal.

How to Set Up a Group RRSP

There are a few steps to setting up a group RRSP for your employees. Luckily, there are many great providers that will help you get set up.  

1. Choose a Provider

Step one is to choose a group RRSP provider. You’ll find some big names like Manulife, Sunlife, RBC, Cooperators and WealthSimple.  

The basic idea will be the same with the different providers, but the cost can fluctuate from one provider to the next. Some providers do a better job of providing this information than others.

We chose WealthSimple because of their straightforward fee structure and investment portfolios. Since then, we’ve come to appreciate their strong customer service and intuitive user interface as well.

2. Design the Plan

As the employer, you have the flexibility to design the plan however you like. You can offer to contribute a set dollar amount, percentage of salary or match employee contributions up to a maximum amount.

You may want to do some research to see what your competitors are offering to make sure that you are providing competitive compensation. Retaining happy and productive employees is such an important part of running a successful business.

You can choose which employees or levels of employees are eligible to participate. You may want to offer a group RRSP to management only or to all full time employees - it’s completely up to you.

You will then choose which types of investments can be purchased with the group RRSP funds. The advice we received was to keep the investment structure streamlined. This helps simplify your employees’ decision making when choosing investments. 

We opted to go with WealthSimple because they offer understandable, diversified investment portfolios that are chosen based on a simple risk-level questionnaire. 

3. Implement the Plan

This part is really just administrative work that will mainly be facilitated by your provider.

You’ll have some forms to fill out with your employees’ information such as salary, date of birth, date of hire, etc.

Your employees will also have some forms to fill out that includes their banking info and some personal details.

You will then need to connect with your payroll provider to set up RRSP contributions. Funds will be withheld from employee paycheques and deposited into their RRSP accounts.

4. Communicate Details with Staff

You will want to make sure that you communicate very clearly with staff members so that they know what to expect from the group RRSP plan.

Funds are withheld from paycheques to be contributed to RRSP plans which means that net pay deposits are smaller each period. It’s important that your team understands how the savings plan works and where their money is going!

If you have team members who are new to investing, it’s also a good idea to explain how it works or provide resources to them about investing. Investments don’t always go up and it can be disconcerting to see red numbers on an investment statement.

5. Ongoing Oversight of the Group RRSP

It’s a good idea to keep on top of how the group RRSP is working for your business. To do this, you can implement a formal process to make sure that things are running smoothly. Task a specific team member or committee with overseeing the plan and set up an ongoing review process at least annually.

You can also survey employees to see what they are thinking and feeling about the group RRSP plan. This will provide great feedback and allow you to consider changes to the plan based on how well it is meeting the business’ needs.

How Much Does a Group RRSP Cost?

Group RRSPs have some costs associated with them for both the employer and employees who are participating in the plan.

Costs to Employers

The costs of a group RRSP for the business include:

  • Employer RRSP Contributions - the employer portion of contributions is a cash outflow that is a cost to the business.
  • Administration Fees - The plan provider will charge a fee to administer the group RRSP. This is typically calculated as a certain amount per participating employee and is typically in the $125 to $150 per employee per year range.

Costs to Employees

There is also an investment management cost to employees which is common to both individual RRSPs and group RRSPs. This is not incurred by the business, but is deducted from employees’ accounts as part of the cost of managing the investments.

Investment management costs can vary widely depending on the investment provider. They are charged as a percentage of the investment value within the plan. These fees can range from as low as 0.4% and can commonly go as high as 2%.

WealthSimple’s passive investment strategy offers lower management fees compared to actively managed investments. This is a big part of why we use WealthSimple as a plan provider.

The comparison we were offered by WealthSimple goes like this:

Wealthsimple’s fee is 0.5% (or 0.4% for investments over $100,000). If your employee is starting fresh with nothing in savings yet and contributes $1,000 a month (employee + employer contributions) or $12,000 a year, here’s what the two plans would look like after 5, 20, and 30 years.*
After five years with the average mutual fund, that employee will have lost about $1,479 to higher fees. After 20 years, that number jumps to $41,941. And after 30, $126,692.

Frequently Asked Questions About Group RRSPs

Is a group RRSP Good?

Group RRSPs are a great way for employees to save for retirement. They also allow smaller employers to offer a retirement savings plan to their employees. Often a traditional pension plan is too costly to offer for smaller businesses.

What is the difference between an RRSP and a group RRSP?

A group RRSP is similar to an individual RRSP in that it is a retirement savings plan. The group RRSP is one that is offered through an employer. Employees contribute directly by having amounts withheld from their paycheques. 

Group RRSPs also allow employers to contribute to employees’ RRSP accounts. Employers can match employee contributions or offer a set contribution value.

What is the difference between a group RRSP and a pension plan?

A group RRSP is a retirement savings plan that is offered through your employer but provided by a financial institution. Both the employee and employer can contribute to this plan to save for the employee’s retirement. The employee owns the investments directly and can decide when to withdraw funds as needed.

A pension plan is an employer-based retirement savings plan. Like a group RRSP, the employer establishes the plan with a financial institution. Then, employees contribute to the fund by withholding amounts from their paycheques. Investments are owned by the pension plan and plan members can receive pension payments at a predetermined future time.

What happens to your group RRSP when you quit?

When you quit your job, investments held within a group RRSP account are typically transferred on a tax-deferred basis to your individual RRSP account. This means you don’t pay tax at the time of the transfer. 

If you don’t have an individual account, you can create one and transfer the group RRSP contents into it.

Alternatively, you can withdraw funds from the group RRSP, but this would be included in your taxable income in the year of the withdrawal.

Can you deduct group RRSP contributions?

Group RRSP contributions made by employees can be deducted from their personal taxable income.  The employer portion can also be deducted from the employee’s personal taxable income.

Group RRSP contributions made by employers can be deducted as a business expense as well.

Will I get a tax receipt for my group RRSP contributions?

The plan provider will issue a tax receipt each year. The receipt will show the total amount of contributions made (employer contributions plus employee contributions).

Article by
Paul Sharpe, CPA, CA
.
Originally published
July 27, 2022
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