Newsletter no. 98-2, Treating Excess Member Contributions Under a Registered Pension Plan

July 8, 1998

This newsletter explains how you, as a registered pension plan (RPP) administrator, can pay or transfer excess member contributions after applying the 50% employer funding rule under a designated provision of Canadian federal or provincial law¹. Excess member contributions are member contributions plus interest that are more than 50% of the value of a member's benefits under a defined benefit provision of an RPP. Generally, the funding rule applies when a plan ends, a member of an RPP retires, ends employment or membership, or dies.

Definition and references

Money purchase vehicle means a registered retirement savings plan, a registered retirement income fund, or a money purchase provision of an RPP. References to the Act mean the Income Tax Act, and references to the Regulations mean the Income Tax Regulations.

Permissible benefits

Subsection 21(2) of the Pension Benefits Standards Act, 1985 states that a member's pension under a defined benefit plan must be increased by a certain amount. It is the amount that can be provided by the excess of the member's post-1986 contributions and interest over 50% of the value of the member's benefits for post-1986 service. Most provincial pension benefits legislation have similar 50% employer funding rules.

Under subparagraph 8502(c)(iii) of the Regulations, you can pay additional benefits under a plan, as a result of applying the 50% employer funding rule of the pension benefits legislation governing that plan². Alternatively, the subparagraph lets you apply the 50% employer funding rule of any pension benefits legislation to all members, regardless of the pension benefit authority governing the plan's registration or of a member's province of employment. Although the Regulations allow you to apply the 50% employer funding rule of any pension benefits legislation, the plan's governing pension benefits legislation may not.

Generally, pension benefits legislation allow you to pay excess member contributions to the member, transfer them to another RPP, use them to increase the basic retirement benefit or to purchase an annuity. Also, the income tax rules allow you to transfer excess member contributions from a defined benefit provision of an RPP to a money purchase vehicle as explained below.

Transfer of excess member contributions to a money purchase vehicle

Subsection 147.3(6) of the Act allows you to transfer, for an individual, a lump-sum amount equal to the individual's pre-1991 contributions, which also includes pre-1991 excess member contributions. If all of the conditions outlined in subsection 147.3(6) are met, the amount you transfer is not subject to limits.

If the excess member contributions include both pre-1991 and post-1990 contributions, you have to be able to substantiate that the amount to be transferred under subsection 147.3(6) is reasonably attributable to contributions (including interest) made before 1991.

Subsection 147.3(4) of the Act allows the transfer, for an individual, of a lump-sum amount equal to the value of a member's entitlement instead of other benefits under a defined benefit provision, subject to the prescribed amount under section 8517 of the Regulations. The amount of excess member contributions that you can transfer under subsection 147.3(4) is limited as described in the two following sections:

Commuting benefits

Paragraph 8503(2)(m) of the Regulations allows you to pay a lump-sum amount under a defined benefit provision for a member instead of other benefits to which the member is entitled.

If a member's retirement benefits are commuted under paragraph 8503(2)(m), paragraph 8517(5)(f) of the Regulations provides that the additional benefits you created by applying the 50% employer funding rule are not included in calculating the prescribed amount.

The sum of the commuted value of a member's benefits under the defined benefit provision plus the excess member contributions may be less than the prescribed amount under section 8517. If so, you can transfer this amount from the defined benefit provision to a money purchase vehicle. If the sum is more than the prescribed amount, you have to pay the excess to the member, unless you can transfer it under subsection 147.3(6).

Not commuting benefits

If the member chooses to receive a pension, there is no transfer of funds and therefore no prescribed amount. Since no lifetime retirement benefits are commuted, variable A in subsection 8517(1) is nil. As a result, you cannot transfer excess member contributions under 147.3(4) of the Act.

Example

A member ends employment at age 47. The commuted value of the member's accrued benefits is $90,000. The total of the member's contributions plus interest is $50,000. The prescribed amount is $92,000.

The plan provides for the application of the 50% employer funding rule to all years of service. This results in excess member contributions of $5,000 [$50,000 _ (50 % of $90,000)]. The plan's actuary determines that the pre-1991 excess member contributions are $2,000 and the post-1990 excess member contributions are $3,000.

The total amount of benefits to which the member is entitled under the plan is $95,000. This amount is the sum of the commuted value of $90,000 and the excess member contributions of $5,000.

Result

In the example, the plan administrator can make tax-free transfers to a money purchase vehicle for the member as follows:

• Subsection 147.3(6) allows the transfer of $2,000 as a return of pre-1991 excess member contributions.
• Subsection 147.3(4) limits the transfer to the prescribed amount of $92,000.

The plan administrator has to pay $1,000 to the member as a lump-sum who has to include it in personal income.

If the member chooses to receive a pension, the plan administrator can only transfer the pre-1991 excess member contributions of $2,000 to a money purchase vehicle. The post-1990 excess member contributions of $3,000 would not be eligible for a tax-free transfer out of the plan. They can be used to provide additional pension benefits under the defined benefit provision or be distributed according to the provisions of the Act and the pension benefits legislation that applies.