The Quebec Voluntary Retirement Savings Plan (VRSP) An overview of the newly announced workplace retirement savings plan

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1 The Quebec Voluntary Retirement Savings Plan (VRSP) An overview of the newly announced workplace retirement savings plan Use this summary of Quebec s recently-introduced Voluntary Retirement Savings Plan (VRSP) Act (Bill 39) to learn about this new retirement savings vehicle, any responsibilities you may have, and other important facts. The VRSP is Quebec s version of the federally-endorsed Pooled Registered Pension Plan (PRPP), with some variations specific to Quebec. General Information What is a VRSP? How does a VRSP differ from a traditional pension plan? A Voluntary Retirement Savings Plan (VRSP) is a new type of group retirement savings plan. It is a defined contribution pension plan with some differences that make it simpler than a typical defined contribution pension plan. The VRSP offers tax advantages for both employers and employees, similar to those offered by a traditional pension plan. The VRSP differs from a traditional pension plan in these ways: The financial institution that manages the VRSP s assets (referred to as the administrator) is directly responsible for providing annual reporting to the Régie des rentes du Québec. The administrator must operate the plan with the prudence, diligence and skill that a reasonable person would exercise in similar circumstances on behalf of the members of the plan. Since the VRSP pools the savings from multiple employers and their employees in the retirement plan, investment management fees will generally be lower than fees someone would receive individually. Legislation for the VRSP is separate from the provincial pension legislation, making it more user friendly. Many of the day-to-day administrative tasks that a defined contribution pension plan sponsor is responsible for, such as Pension Adjustments, are not required for a VRSP. An employer is not required to contribute to a VRSP unlike a defined contribution pension plan that requires an employer to contribute a minimum of 1 per cent. 1

2 General Information continued Why did Quebec create this new group retirement savings plan? The Quebec government has taken an early lead in providing access to a workplace savings vehicle to help its residents save adequately for retirement. A large number of Quebec workers do not have access to a group retirement savings vehicle through their employer. This means that their retirement savings consist primarily of personal savings (such as an RRSP). The VRSP makes it convenient to save through payroll deductions and because workers savings in the VRSP are pooled with the savings of many others, investment management fees are generally lower than the fees an individual would pay in an individual investment account. Who will regulate VRSPs? In addition to the Canada Revenue Agency (CRA), three different Quebec agencies will be involved in the regulation of VRSPs: Employer Information 1) Autorité des marchés financiers will issue the administrator s license. 2) The Régie des rentes du Quebec will oversee VRSPs and ensure that they are administered and operated in accordance with VRSP legislation. 3) The Commission des normes du travail will be responsible to oversee the duties of an employer with respect to the enrolment of employees in VRSPs, and will enforce compliance with the law. How do I know if I have to set up a VRSP for my employees? Any Quebec business may choose to set up a VRSP for its employees but if the employer has five or more eligible employees who have at least one year of uninterrupted service on December 31 of a year, the employer will be required to join a VRSP in the following year, unless a registered pension plan or a registered retirement savings plan is in place. If a company has five employees but they do not all have one year of uninterrupted service, the company would not be required to offer a VRSP until all five employees have attained one year of uninterrupted service. What happens if my company does not have five employees? What happens if an employer does not set up a VRSP in the required timeframe? What employees are eligible for the VRSP, and when? Businesses with one, two, three or four employees do not need to set up a VRSP however, they can if they wish. Self-employed individuals can also join a VRSP. The Bill indicates that an employer may face penalties for not putting a VRSP in place for its employees Employees with at least one year of uninterrupted service must be enrolled into the VRSP. Employees who do not have one year of uninterrupted service with the employer may also choose to join the VRSP. Self-employed individuals may also join a VRSP. As well, individuals who work for companies with fewer than five employees and that do not offer a VRSP, may join a VRSP on their own. They will be called individual savers. 2

3 Employer Information continued Do employers have to contribute? No. Employers are not required to contribute to their company s VRSP. However, they may choose to do so. Aside from the benefits of employee retention and attraction, if any employer chooses to contribute, these tax benefits are available: Employer contributions are not subject to payroll taxes. Employer contributions may be deducted from income for tax purposes. What are the benefits to an employer if the company does make contributions? If an employer makes contributions to their employees VRSP account, there can be many benefits for the employer, including: Acknowledgement the employer is helping their employees save towards their retirement. Attraction of key employees to the company, and ability to be competitive with other employers seeking to hire talented individuals. Retention of key employees to the company. Employer contributions to a VRSP are tax deductible for the company. What if a company starts to make employer contributions, but then has a slow period. Is the company obligated to keep on making employer contributions? What are the employer s tasks beyond offering employees access to a VRSP? An employer may change its contribution rate at any time, and only has to notify employees and the administrator of this in writing. If the employer contribution rate is being lowered or stopping, the change cannot begin until 30 days has passed from the date the notice was sent. The employer is responsible for the following tasks: Notify its employees within 30 days in advance of the contract being signed, that the VRSP will be established. Deduct money from their employee s earnings via payroll deductions and send it to the administrator on a regular basis. Provide employee demographic data (such as name and address) to the administrator and enroll employees as they become eligible. Notify the administrator if an employee terminates employment, dies or retires. The employer does not have the same duty to its emp loyees under legislation and applicable guidelines, as it does under traditional pension plans. Many of the traditional obligations are shifted to the VRSP administrator. What are the costs of the VRSP to the employer? The employer will not be required to pay any fees for offering a VRSP, unless they choose to move the plan (see below). 3

4 Employer Information continued What happens if a company is late sending the VRSP contributions to the administrator? Can the employer move a company s VRSP to another administrator? An employer must send VRSP contributions to the administrator no later than the last day of the month following the month the contributions were deducted. For example money deducted from the employee s June 30, 2014 pay cheque must be sent to the administrator by July 31, If an employer fails to do so, the administrator is required to report this to the Régie and the employer will be required to include interest on any late contributions. Yes. If the employer wishes to move the VRSP from one administrator to another, they may do so. Employees may not be charged a fee for this but instead the employer must pay all costs related to the transfer of plan assets. Employee Information Who decides which financial institution will administer their VRSP? When are employees enrolled in the VRSP? How are employees enrolled in the VRSP? Do employees have to stay in the VRSP? What happens if a member fails to terminate membership or participation within the 60 days of being notified of their membership? What if a member who opted out in the first 60 days changes their mind later and would like to join? How much money must an employee contribute? The employer is responsible for selecting the organization that will be the administrator of their VRSP. Individual savers can choose their own administrator. All employees must be enrolled in a VRSP once they have one year of uninterrupted service. An employer will automatically enrol its employees that have one year of uninterrupted service into their VRSP. This is done by the employer providing the administrator with the required employee information to establish a VRSP account. The administrator in turn sets up an account for each employee. Employees will have 60 days to notify the employer of their desire to opt out of the VRSP. No. An employee may terminate their membership or participation in the VRSP at any time. It currently appears that an employee may decide to opt out of the VRSP at anytime however if they fail to do so, payroll deductions will begin. An employer must offer eligible employees who have opted out or terminated membership in the VRSP, an opportunity to re-join the plan every two years, unless the employer agrees to allow them to join before that time. An employee s contribution rate will automatically be set at the following percentage of earnings: 2% of earnings from January 1, 2014 to December 31, % of earnings from January 1, 2017 to December 31, % of earnings as of January 1, 2018 However, employees may change their contribution rate to the amount they prefer, and may change their contribution rate to zero. These changes can be made no more than twice every 12 months, unless an employer agrees to allow an employee to make changes more frequently. 4

5 Employee Information continued How is the money sent to the administrator? How much money can be put into a VRSP each year? If an employee has registered room at the end of the tax year, can a lump sum deposit be made to their VRSP? What are the tax advantages of a VRSP to an employee? How is an employee s money invested? The employer deducts the employee s VRSP contribution from their earnings and is required to submit both employee, and if applicable, employer contributions to the administrator for investment in the employee s VRSP account. VRSP contributions (both employee and employer, if applicable) are subject to the same annual cap as RRSPs, which is the lesser of 18 per cent of earned annual income or $23,820 (for 2013). This means employees will need to monitor contributions to their VRSP account plus the amount contributed to any personal RRSP to make sure they do not exceed the amount they are allowed to contribute to a registered plan. This is unknown at this time. Employee contributions to a VRSP are deductible from income before income tax is applied in the same manner as RRSP contributions. As well, money contributed to the VRSP is not included in an employee s taxable income and the employee does not pay income tax on this money until it is withdrawn (ideally at retirement). Employee contributions will automatically be invested into an acceptable default fund unless an employee provides different investment instructions. There has been discussion that a life cycle fund is an example of an acceptable default investment option. A life cycle fund is a balanced fund whose mixture of equity and fixed income changes over time. The further someone is from retirement, the more equity the fund has and over time, more fixed income is present, and then ultimately at the time of retirement the fund is primarily fixed income. This type of fund requires no day-to-day management by the employee. The professional fund manager rebalances the fund due to performance but also as the fund approaches retirement. The administrator may also offer other investment options with varying degrees of risk. At anytime the employee may change how their savings are invested, but if the employee makes no election, the default investment will apply. What fees apply to an employee who participates in the VRSP? An employee will pay an Investment Management Fee (IMF), which is a percentage of the savings in their account. For example, if the IMF is 1.25% this means the employee will pay 1.25 cents each year for every dollar they have invested. Bill 80 indicates that the VRSP must be provided at the same cost and on the same conditions to all employers who participate in the plan and to all employees who become members of the plan. Members may also be required to pay fees for activities such as making withdrawals. Since the fees will be lower than an individual investment plan, can employees move their RRSP savings to the VRSP? Yes. 5

6 Employee Information continued Can an employee withdraw money? Will employees be able to establish a spousal VRSP? What happens when a member terminates employment? What happens when a member dies? What happens when a member retires? How are contributions or investments protected? An employee may withdraw his/her own contributions, subject to withholding tax, once a calendar year. An employee may not withdraw contributions made by the employer until they turn age 55 or terminate employment, at which time employer contributions become available to be transferred. However, there are certain conditions, such as reduced life expectancy, small balance in the employee VRSP account or the employee's place of residence is outside Canada for two years, under which the employee may withdraw employer contributions. No. Employees are entitled to the full value including employee contributions and employer contributions, if applicable of their VRSP account upon termination of employment. Employer contributions remain locked-in. When a member dies their account balance is payable to their spouse. If there is no spouse or the spouse has waived entitlement to the death benefit, the account balance can be paid to the designated beneficiary. If no beneficiary has been designated, the balance is payable to the estate. When a member retires, or reaches age 55, they may use the value of their VRSP to receive a variable benefit payment from their VRSP account balance, where the VRSP plan permits this, or may opt to transfer their savings to another registered vehicle, annuity or retirement income product. If the employee s VRSP is with an insurance company the employee s money is invested in a segregated fund. This means the assets are held separate from the insurance company s own assets and if that company were to fail, the money in the segregated funds would be protected from any of the company s creditors. Qualified Administrators There are, however, no guarantees on the segregated funds performance or returns. Who can I select to administer my VRSP? What are the administrator s duties? Can an administrator refuse to issue a plan for an employer? Can an administrator charge different prices to employers based on the size of their company? Bill 39 currently states possible VRSP administrators include insurance companies, trust companies, and investment fund managers. Administrators will be issued a license by the Autorité des marchés financiers before they can offer a VRSP. Administrators licensed by Quebec operate its VRSP with the prudence, diligence and skill that a reasonable person would exercise in similar circumstances. The administrator must also act with honesty and fairness in the member s best interests. No. Currently, as an administrator licensed by Quebec, every employer who applies for a plan must be allowed by the administrator to join the VRSP. No. The administrator must make the VRSP available to all employers and its employees at the same price regardless of whether the company has, for example, five employees or 50 or more employees. 6

7 Questions and Answers: Q I own a company in Quebec, but have a few employees outside of Quebec. What do I do for these employees? A The Bill indicates that employees located outside of Quebec could join the VRSP as long as they work for a Quebec based employer. Q I own a company based outside of Quebec, but have a few employees in Quebec. What am I obligated to do? A The Bill indicates that it applies to an employer established in Québec, so for example, an Ontario based company with Quebec employees may not be required to join a VRSP, unless they are considered to have an establishment in Quebec as set out in the Quebec labour legislation. These employees could however join a VRSP on an individual basis. Q I already offer a group RRSP to my employees. Do I have to establish a VRSP? A No. A group registered retirement savings plan, defined benefit or defined contribution pension plan, Quebec simplified pension plan meet the definition of a workplace savings plan and therefore a VRSP is not required to be set up. Q I offer a group RRSP now, but the VRSP IMFs are lower than what my employees pay. Can I shut down my group RRSP and open a VRSP instead? A Yes. The company can switch its workplace savings plan from a group RRSP to a VRSP. Q My company employs seasonal workers. Sometimes I have 10 employees and at other times I have three. What do I have to do? A If the seven seasonal employees do not achieve one year of uninterrupted service they do not qualify towards the five life minimum, and the employer is not required to offer a VRSP, however the employer may choose to do so. Q My company had seven employees but then I had to downsize and now only have two employees. Can I shut down my company s VRSP? A Employers that had to comply to set up a VRSP must continue to do so as long there are employees enrolled in the VRSP even if the number of employees falls below five. Q I already offer a retirement savings plan in my company, but I just don t make it available to everyone. Do I have to establish a VRSP? A Yes. You could choose to offer the existing company retirement savings plan to those employees not currently included, or you could set up a VRSP for those employees. 7

8 For more information, talk to your Manulife representative, visit vrsp.com/advisor, or The information in this document is based upon information from the draft legislation. It is subject to change and cannot be considered final until legislation and regulations are passed later this year. Manulife, Manulife Financial, the Manulife Financial For Your Future logo, the Block Design, the Four Cubes Design, and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license. 11/