RPP Practitioners' Forum - 2009
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Ottawa - June 2, 2009
Questions and Answers
- Determination of normalized pension for a hybrid plan
- Excess contributions to an RPP due to reasonable errors Updated
- Reciprocal transfer involving a plan with an unfunded liability
- Payment to an employee instead of a termination notice
- Excess surplus issue
- Maximum transfer value – section 8517 of the Regulations
Question 1 - Determination of normalized pension for a hybrid plan
This question relates to the application of section 8517 of the Income Tax Regulations for a hybrid plan where the amount of lifetime retirement benefits provided under the defined benefit (DB) provision of the plan is reduced by the benefits under the money purchase (MP) provision of the plan. We are seeking help in determining the normalized pension in subsection 8517(5) of the Regulations to calculate the prescribed amount. In particular, how does paragraph 8517(5)(e) of the Regulations apply to determine a reasonable estimate of the other benefits that affect the DB pension?
Go to the RPD Technical Manual, 20.6 8517(5) – Normalized Pension
Question 4 - Excess contributions to an RPP due to reasonable errors
The answer to question 16 of the 2008 RPP Practitioners' Forum states that an exception will be made when an excess contribution was made as a result of a reasonable error and the problem is identified by the employer or plan administrator in a timely manner. Will it be possible to explain what the RPD considers to be "reasonable errors"?
Go the RPD Technical Manual, 2.18 147.1(19) – Reasonable error
Question 6 - Reciprocal transfer involving a plan with an unfunded liability
In Quebec, the plan administrator must comply with sections 142 and 146 of the Supplemental Pension Plans Act (SPP Act) when the member's benefit entitlement is transferred from a plan with a transfer ratio under 100%. The SPP Act allows for an employer to fund this deficit with an immediate additional contribution or may wait up to five years. Our question lies where an employer was to wait until the end of the five year period.
Because of the eligible service definition under subparagraph 8503(3)(a)(v) of the Regulations and the definition of member under subsection 147.1(1) of the Act, among others, our understanding is that we are not allowed recognize service in another plan, even in part, until the employee is no longer a member in the previous plan under the Act.
Please confirm if, for a plan with an unfunded liability, we are allowed to recognize the service in another plan by way of a transfer agreement before the member's benefit entitlement has been fully satisfied. For example, by inserting a reference to the reciprocal transfer agreement, could we recognize the full service while considering that the value of the benefit entitlement will be transferred in two instalments under the reciprocal transfer agreement, or could we recognize part of the service immediately, by prorating the value of the transferred amount based on the full value of the benefit entitlement to be transferred and recognize the balance of the service at the time of the second instalment?
Go to the RPD Technical Manual, 10.1.5 8503(3)(a)(v) & (vi) – Former employer
Question 7 - Payment to an employee instead of termination notice
The pension adjustment (PA) rules in section 8300 of the Regulations currently do not contemplate a scenario in which an employer elects to make a lump sum payment in lieu of its obligation to provide reasonable notice of termination of employment. As a result, providing pension accruals for the period of notice for which the lump sum payment relates would, in scenarios where the period of notice extends beyond the end of a calendar year, place the plan's registration in a revocable position. To alleviate this situation, would CRA approve, or give consideration to approving, an application by the employer to the Minister under subsection 8310(2) of the Regulations to "deem" a part of the lump sum payment to be "compensation" in the year for which it is pensionable earnings under the terms of the pension plan for the PA rules?
It is proposed that the Minister use his authority under subsection 8310(2) of the Regulations to allow a part of a lump sum payment, made instead of a period of termination notice that extends beyond the end of a calendar year, to be deemed as compensation for pension accrual and PA purposes. Subsection 8310(2) of the Regulations states that should the rules in Part LXXXIII of the Regulations (which deal with PAs and PSPAs) require the determination of an amount in a way that is not appropriate having regard to the provisions of that Part read as a whole and for the purposes for which the amount is determined, the Minister may permit the amount to be determined in a way that, in the Minister's view, is appropriate.
It is important to note that the Minister's authority under subsection 8310(2) is used under very limited circumstances and should apply only where the related service is pensionable service. To be considered as pensionable service, a period of time must first qualify as a period of eligible service under the Act. Whether or not a period of time for which payments to an individual are made instead of termination notice will qualify as eligible service for pension purposes under the Act will depend on the facts of a particular situation. A period throughout which a salary continuation arrangement exists might qualify as a period of pensionable service (such as in a pre-termination leave with pay situation) if the employer/employee relationship stays intact during the arrangement. However, to provide continued pensionable service accruals after the termination of an employer/employee relationship for a period of termination notice for which either a series of payments or a lump sum payment is made instead would not be allowed under the Act. The post-employment period would not qualify as eligible service; therefore we do not foresee the Minister's authority under subsection 8310(2) of the Regulations being used as proposed. Also, there are already acceptable ways, such as the aforementioned salary continuation arrangement, in which more pensionable service could accrue, so employers are not without options.
A similar question and answer on severance payments, salary continuation arrangements, and compensation, was discussed at the 2004 RPP Consultation Session. For more information see Question 10.
Question 8 - Excess surplus issue
A DB pension plan revealed a large surplus according to the last filed valuation report such that employer contributions are not allowed under subsection 147.2(2) of the Act. However after the recent market turmoil there is an indication by the pension regulator or plan administrator that the plan's solvency position has deteriorated. Although the pension regulator does not require the filing of a new valuation until it is due, any asset transfer out of the pension fund would require a prior consent from the regulator. What is the filing requirement by CRA that would warrant an earlier funding schedule than the one stated in the last filed valuation report, if any.
Go to the RPD Technical Manual, 3.3 147.2(3) – Filing of Actuarial Report
Question 9 - Maximum transfer value – paragraph 8517 of the Regulations
When a commuted value is not paid in a single lump sum due to the transfer ratio of the pension plan that is less than 100%, what is the proper application of paragraph 8517 of the Regulations limit?
Go to the RPD Technical Manual, 20.3 8517(3), (3.001), (3.01), (3.02) – Underfunded Pension
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