In 2014, a new retirement savings option rolled into town: the VRSP. This type of retirement savings plan is now one of the many options available to small business owners, along with the Group RRSP.
A voluntary retirement savings plan (VRSP) is similar to a group registered retirement savings plan (group RRSP) in a lot of ways. Both are set up by an employer to allow employees to save for retirement. Both allow employees to have their own account, and contribute the amount they want to it through payroll deductions, for which they receive immediate tax relief. In both cases, employers can match employee contributions, but are not obligated to do so. However, this is where the similarities between the two plans end. Read on to learn about their benefits, and how they differ.
VRSPs were introduced by the Quebec government in 2014 to ensure all workers are covered by a group savings plan, and to encourage them to save for retirement. As such, all companies with five or more eligible employees that don’t already offer a group RRSP, tax-free savings account (TFSA) or registered pension plan (RPP) are required to offer a workplace retirement savings plan to their employees.
As per the law, eligible employees are people aged 18 or over who have a minimum of one year of uninterrupted service on a full- or part-time basis.
There are two major differences between the plans.
The first: Management fees. While there are no limits to them with a group RRSP, management fees with a VRSP are, by law, capped at 1.25% for the default investment option and 1.5% for all other options.
The second: Employers are required to automatically enrol all eligible employees in a VRSP if they do not currently offer a workplace savings plan. The employees are then free to withdraw from the the VRSP in the 60 days following their enrolment.
Compared to your average group RRSP without employer contributions, VRSPs are more beneficial to society because they force employees to put money aside for when they retire due to the automatic enrolment process. As such, more Quebecers will be financially prepared for retirement.
Another benefit of VRSPs for employees: Employer contributions to a VRSP are exempt from payroll taxes. This means that no deductions are made to the employer’s contributions, and the full amount goes to the employee’s retirement fund.
On the flip side, it’s more demanding for a company to offer and manage a VRSP, in part because the employer is obligated to enrol all eligible employees. This means more time spent managing and doing followups.
As an employee with a VRSP, you’ll notice that your investment options are limited. There’s also less flexibility, as your employer’s contributions to your VRSP are locked-in until you retire or reach the age of 55. So, although their contributions are guaranteed to be waiting for you when you retire, you can’t withdraw those funds from your VRSP if something life-changing happens (e.g. job loss, illness, divorce, etc.).
On the other hand, there are many benefits for both the employer and employees with a group RRSP. “It’s the easiest retirement savings plan to manage, and the one that offers the most flexibility,” states Danick Lessard, Group Retirement Plan Sales and Services Advisor at National Bank Insurance. While all employees across all job categories are rendered equal under a VRSP, a company has the power to define contributions under a group RRSP.
An advantage for employees is that there’s no minimum contribution amount. They can decide how much they want to contribute, whereas with a VRSP, contribution amounts are fixed (3% of the employee’s salary in 2018) unless the employee decides to change it. Apart from the flexibility a group RRSP offers, the biggest advantage for employees is that they benefit from lower management fees due to the pooling of all employee assets. In some cases, like with very large group plans, the fees may be even lower than those under a VRSP.
Lastly, under a group RRSP, employees have the option of withdrawing their savings—both their contributions and their employer’s—at any time. Withdrawals are taxed as regular income though.
Seeing as these two retirement savings plans are quite different, it’s important to weigh the pros and cons of each option. By picking the plan that’s best suited to the needs of the company, everyone stands to gain!
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