How does the VRSP work?
Introduced by the Quebec government in 2014, the VRSP is a bit like a piggy bank that employers set up to help their employees save for retirement.
Employers don’t have to add money to the piggy bank, but nothing prevents them from doing so. By making this one of the benefits offered to staff, employers may gain a competitive edge in attracting employees.
Once the VRSP is set up, employees simply choose the percentage they want to save each month, and the amount is deducted directly from their salary. The money saved in the VRSP is intended to provide retirement income for the employee.
Withdrawals are allowed
Employees have the option of making withdrawals once every 12 months, but the employer’s contributions (if applicable) are locked in until the employee reaches 55 years old. Withdrawals are taxable.
There are some exceptions to these rules, including if the employee needs the money because they have become disabled.
If you change jobs before retirement, there’s no need to worry: your VRSP belongs to you. You can transfer the money to an RRSP. If your employer has contributed to your plan, their contributions will be transferred to a locked-in retirement account (LIRA) in your name.
Are you self-employed? You can also sign up for a VRSP. Several financial institutions offer this type of plan.
How much money can I put into a VRSP? Until what age?
The latest that you can contribute to a VRSP is December 31 of the year in which you turn 71 years old.
There is no minimum amount that you have to contribute to your VRSP. The maximum that you can put in each year—your contribution limit—is the same as for an RRSP. The amount is a percentage of your income, up to a limit that is revised each year.
Remember that the money you invest in a VRSP affects your RRSP contribution room. By putting $1 in your RRSP, you reduce the amount you can contribute to your VRSP by $1.
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Do employers have to offer a VRSP? Do employees have to participate?
Businesses in Quebec with five or more eligible employees (aged 18 or over with one year of uninterrupted service) must offer a VRSP. However, it is not mandatory if they offer a registered pension plan, a group RRSP or a tax-free savings account (TFSA).
When a business sets up a VRSP, eligible employees are signed up automatically. They then have 60 days to withdraw from the plan. After that, they will have to wait a year before making any further changes.
Good to know: if you’re an employee and you aren’t automatically enrolled in the VRSP, you can choose to enrol yourself.
What VRSP rules do employees and employers need to know?
- Once your employer sets up the plan, enrolment is automatic.
- By default, contributions are set at 4% of your gross salary (before taxes and deductions).
- Once you’re enrolled, you have 60 days to opt out or make changes (such as the percentage deducted from your pay).
- After the 60 days are up, you will have to wait a year to make any changes.
- Management fees for VRSPs are capped at 1.25% for the default investment option and 1.5% for other options, which means that you won’t pay a lot in management fees for your plan.
- You get an immediate tax refund on your contributions.
- There are a few investment options to choose from (but the choice is quite limited).
- You aren’t required to contribute to the plan on behalf of your employees.
- If you do decide to make contributions, you won’t pay payroll taxes on them (unlike an RRSP).
- Offering a plan may help you to attract employees.
- Businesses that set up a VRSP are required to enrol all eligible employees, which may increase the administrative burden.
How do you set up a VRSP?
Once an employer has decided to set up a VRSP, there are six steps to follow.
1- Decide who will administer the VRSP. The administrator, like a financial institution, must be registered with the Autorité des marchés financiers (AMF).
2- Inform your employees that you are setting up a VRSP at least 30 days before Step 3. The notice must contain specific information, which you can find on the Retraite Québec website.
3- Sign the contract with the VRSP administrator.
4- Within 30 days of Step 3, enrol all employees covered by the VRSP.
5- The plan administrator must then send a notice to employees confirming their membership. Contributions will be deducted from the employee’s pay following the 61st day after the confirmation notice is sent.
6- Remit the VRSP contributions to the administrator (no later than the last day of the month following the month in which contributions were deducted).
To make sure you choose the right pension plan, it’s best to speak with an expert. Do you need advice? Make an appointment with one of our advisors. We’re here to answer your questions.