On May 5, 2020, the Canada Revenue Agency (“CRA”) announced temporary COVID-19 relief measures for employers with defined contribution pension plans (“DC Plans”), also known as money purchase pension plans. The relief measures allow employers to amend their DC Plans such that the employer and their employees need not make any contributions under the plan for the rest of 2020.
Under the Income Tax Regulations, contributions to all pension plans registered with the CRA that provide benefits purely on a defined contribution basis must be determined in a manner that is acceptable to the Minister of National Revenue. Pursuant to this power, a rule was established that requires employers to make yearly contributions of at least 1% of the total pensionable earnings of all workers participating in the DC Plan.
The relief measures waive the 1% contribution requirement, allowing DC Plans to be amended such that neither the employer nor employees will be required to make any more contributions for the rest of 2020. Crucially, employers can only avail themselves of the relief measures if they amend their DC Plan and submit the amendments to be registered with the CRA Registered Plans Directorate, as well as the applicable federal or provincial pension regulator.
Takeaways
The relief measures provide employers that have DC Plans with the flexibility to modify the terms of such plans in order to eliminate the need for employer and employee contributions to the plan for the remainder of 2020. Clearly, eliminating the need for contributions to DC Plans will allow both the employer and their employees to keep more money in their pockets during the COVID-19 pandemic, when the finances of many people and organizations are spread very thin.
However, employers would be well advised to consider how their employees would feel about eliminating DC Plan contributions for the rest of the year prior to making such amendments to their plan. On the one hand, some employees may be happy to not have to make employee contributions for the rest of the year, in light of financial difficulties resulting from the COVID-19 pandemic. On the other hand, some employees that are more financially secure may take serious issue with such amendments because it will reduce the value of their pension in the long run. Employers may face constructive dismissal risks if they unilaterally make such amendments. Additionally, employers should confirm that they are not violating the terms of an employee’s employment agreements with respect to promised pension entitlements.
Furthermore, unionized employers may be precluded from amending the terms of the DC Plan in order to take advantage of the relief measures by the terms of their collective agreement.
Employers considering taking advantage of this relief measure should carefully review their collective agreement or employment agreements with their employees, and would be well advised to seek legal advice before implementing any changes.
This blog is provided as an information service and summary of workplace legal issues. This information is not intended as legal advice.