Chapter 14 - 8506 – Money Purchase Provisions

 

14 8506 – Money Purchase Provisions

Section 8506 of the Regulations describes the benefits that may be provided under an MP provision of a pension plan and contains conditions applicable to a plan that has an MP provision.

A money purchase provision is defined under subsection 147.1(1) of the Act. In order for the terms of a pension plan to be considered an MP provision, the provision must provide for a separate account to be maintained in respect of each plan member, and the benefits in respect of a member must be benefits that can be provided by the amount in the member’s account. Where the terms do not satisfy these conditions, they will be considered to be a DB provision and are therefore subject to all the conditions in sections 8503 and 8504 of the Regulations.

14.1 8506(1) – Permissible Benefits

14.1.1 8506(1)(a) – Lifetime retirement benefits

The LRBs have to be paid in equal periodic amounts. Exceptions to this general rule are as follows:

  1. Benefits paid to the member may be reduced after the death of the member's spouse or common-law partner.
  2. Benefits paid to the member can be adjusted after commencement in a manner similar to certain adjustments that are permitted under an RRSP. Specifically, the adjustments may occur in the following ways:
    1. increases or decreases depending on the increases or decreases in the value of a specified group of assets constituting the assets of a separate account or fund maintained for the insurance company's variable annuities business;
    2. increases or decreases depending on increases or decreases in the interest rate on which the annuity is based if it equals or approximates an interest rate generally available in the Canadian marketplace;
    3. increases annually to reflect all or a part of increases in the Consumer Price Index;
    4. increases at a rate specified in the annuity contract, not exceeding 4% per year; or
    5. increases annually by the difference between the rate specified in the plan and the rate of return that would have been earned on a pool of investment assets (specified in the annuity contract).

14.1.2 8506(1)(b) – Bridging benefits

If bridging benefits are provided, the plan must state that they will cease no later than the end of the month following the month in which the member turns 65. The plan may provide for the bridging benefit to cease earlier than age 65. There is no limit on the amount of the bridging benefit, since it may only be provided to the extent that the LRBs are reduced. Assuming the entire plan satisfied the primary purpose test under paragraph 8502(a) of the Regulations, it is conceivable that a member could forego all LRBs to receive a bridging benefit. These benefits may also be commuted.

Section 91.1 of the Supplemental Pension Plans Act (SPPA) of the Province of Quebec provides to a member or spouse or common-law partner the right on retirement to replace, in whole or in part, the life pension accrued, by a temporary pension not exceeding 40% of the YMPE of the year in which the payment of the pension begins. This benefit is similar to the bridging benefit permitted under the Act.

Cross reference:

Newsletter No. 94-2, Technical Questions and Answers

14.1.3 8506(1)(c) – Guarantee period

If the plan provides for a guarantee period, it must not provide for a guarantee period in excess of the maximum permitted. The maximum acceptable guarantee period is 15 years from the date the member's pension starts. Should the member die before the expiration of the guarantee period, the pension payments may continue to be paid to one or more beneficiaries until the end of the guarantee period. Alternatively, the remaining payments may be commuted and paid to the beneficiaries in a lump sum as provided under subsection 8506(1)(i) of the Regulations. Only the spouse or former spouse may transfer this commuted value to his or her own RRSP, RRIF, or RPP, as set out under subsection 147.3(7) of the Act.

After 2003, any variable benefits (paragraph 8506(1)(e.1) of the Regulations) that have been paid to the member are not included in the calculation of the remaining guaranteed payments that can be made to the beneficiaries.

14.1.4 8506(1)(d) – Post-retirement survivor benefits

A plan may provide that if the member dies after pension payments commence, the member's spouse or common-law partner, or former spouse or former common-law partner, may receive a pension for life. This survivor pension plus any benefits paid to beneficiaries under a guarantee period option, may not exceed what the member would have received had the member lived. The plan may also permit the spouse or former spouse, common-law partner or former common-law partner to receive a lump sum payment and transfer the amount to his or her own RRSP, RRIF, or RPP, as set out in subsection 147.3(7) of the Act.

After 2003, any variable benefits (paragraph 8506(1)(e.1) of the Regulations) that have been paid to the member are not included in the calculation of the remaining guaranteed payments that can be made to the beneficiaries.

14.1.5 8506(1)(e) – Pre-retirement survivor benefits

A plan may provide that if the member dies before retirement, the spouse or former spouse, common-law partner or former common-law partner (as the beneficiary) may receive a pension for life that starts no later than the later of one year after the day of the member’s death and end of the calendar year in which the beneficiary turns 71. The pension payments may be permitted to be adjusted in the same manner as the member's LRB could have been (equal or varying payments). Bridging benefits may also be payable if the spouse or common-law partner is under 65 years of age, and the payments may be guaranteed for 15 years from when they start.

Alternatively, the plan may permit the spouse, common-law partner or former spouse or former common-law partner to choose a lump sum payment. He or she may transfer the commuted value of the benefit to an RRSP, RRIF, or RPP for his or her benefit, under subsection 147.3(7) of the Act. If someone other than the member's spouse, common-law partner or former spouse or former common-law partner is the beneficiary, that person may only receive a non-transferable lump sum payment.

Cross reference:

Payment of Pension – 8502(e)

14.1.6 8506(1)(e.1) – Variable benefits

After 2003, an MP provision can pay funds directly from the member’s account under the provision. Paragraph 8506(1)(e.1) of the Regulations requires that a minimum amount must be paid to the member and/or beneficiaries of the member for the year. The method for determining the variable benefit for the year is similar to the calculation of the minimum amount from a RRIF. The rules for calculating the minimum amount are set out in subsections 8506(5) and (6).

Plan text

The Registered Plans Directorate will accept the plan terms of an MP provision with regard to variable benefits if the following requirements are met:

14.1.7 8506(1)(e.2) – Variable Payment Life Annuity

Beginning January 1, 2020, paragraph 8506(1)(e.2) of the Regulations permits an MP provision to pay funds directly from the plan by allowing a transfer of amounts from a member’s account to a separate annuities fund under the provision known as a VPLA fund, described in subsection 8506(13) of the Regulations. The retirement benefits (referred to as VPLA benefits) are provided to the member and/or member’s beneficiaries directly from the VPLA fund.

VPLA benefits are generally those retirement benefits permitted for an MP provision under subsection 8506(1) of the Regulations. After VPLA benefits are paid, they can be adjusted in whole or in part by increases to the CPI or by a fixed rate not exceeding 2% per year. VPLA benefits can also be increased or decreased where the amount, rate of return on the fund, or the mortality rate of the VPLA members or beneficiaries differs materially from the actuarial assumptions used to determine the VPLA benefits.

Plan text

The Registered Plans Directorate will accept the plan terms of an MP provision with regard to VPLA benefits if the following requirements are met:

Cross-references:

Payment of Pension – 8502(e)
VPLA fund – 8506(13)

14.1.8 8506(1)(f) – Payment from account

A payment of a lump sum amount can be made from an MP provision as long as the lump sum does not exceed the balance in the member's account. This applies whether the provision relates to required contributions or to AVCs. There are no conditions restricting these payments.

The plan may allow lump sum withdrawals from the member's account at any time. This will accommodate a payment to the spouse or common-law partner on the breakdown of the marriage or partnership, lump sum withdrawals on termination of employment, or termination of the plan.

If the plan provides for it, members may commute both pre-reform and post-reform benefits before terminating employment. Commutation of benefits that have begun to be paid is also permissible.

The requirement under paragraph 9(b) of IC72-13R8, Employees’ Pension Plans, for locking-in of pre-reform benefits that were transferred to an RRSP on retirement, no longer applies.

Cross reference:

Newsletter No. 92-12, Commutation and Opting Out of a Pension Plan

14.1.9 8506(1)(g) – Payments from account after death

A surviving spouse, common-law partner, former spouse or former common-law partner, may be permitted to take the benefit in the form of a lump sum payment instead of a pension. For other beneficiaries, a lump sum payment on the death of the member is the only benefit permitted.

After 2003, paragraph 8506(1)(g) of the Regulations was amended to allow for funds to be paid out even if the member had commenced to receive payments from his or her account.

14.1.10 8506(1)(h) – Commutation of benefits

A plan may allow for the member to receive a lump sum payment at or after retirement in lieu of other benefits to which the member is entitled, where the lump does not exceed the commuted value of the other benefits. Certain federal or provincial pension benefits standards legislation may, however, under their locking-in provisions, require the lump-sum to be transferred to another registered plan such as another RPP, RRSP, or RRIF.

Cross reference:

Designated Laws – 8513

14.1.11 8506(1)(i) – Commutation of benefits after death

A plan may allow for the commutation of all or part of a beneficiary's entitlement to benefits under the plan after the member's death where the lump sum paid does not exceed the commuted value of the foregone benefits.

This paragraph accommodates the commutation of the remaining guarantee payments under the guarantee period option to the member's beneficiary. It also provides for the lump sum payment to the spouse, common-law partner, former spouse or former common-law partner under the post-retirement surviving spouse death benefits.

14.2 8506(2) – Additional Conditions

14.2.1 8506(2)(a) – Employer contributions acceptable to the Minister

1 % minimum contributions

An acceptable way for determining contributions includes what we allowed under IC72-13R8. This includes a percentage of salary or remuneration or a specific dollar amount, or a combination of these determinations; for example $1,000 per year to a maximum of 5% of remuneration.

Unacceptable determinations include a formula derived from the employer's profits for the year with no obligation to contribute the 1% minimum employer contribution, referred to in paragraph 11(a)(ii) of IC72-13R8.

The 1% minimum employer contribution rule is not needed under a combination plan where employer contributions are required to be made to the MP provision of the plan and plan members are also actively accruing benefits under the DB provision of the plan. However, where one or more plan members can opt out of the DB provision and continue to only participate under the MP provision, then the 1% minimum employer contribution rule is needed in respect of those members. A combination plan provides retirement benefits under both an MP and DB provision and members are required to participate under both provisions as a general condition of plan membership. A plan that has members accruing benefits under a DB provision, but also allows DB members to make AVCs (considered to be an MP provision) is also a combination plan.

Contributions

Where a plan applies forfeitures to reduce the employer’s obligation to make contributions to the members’ accounts and where the forfeitures are sufficient to fully reduce the employer’s contributions, the employer will not be required to contribute the minimum 1% employer contribution.

Plan text

Regardless of the determination, it must be clear from the plan text that the employer is required to contribute a minimum of 1% of the total pensionable earnings (compensation) paid to all active plan members. AVCs that are made to an MP provision that is supplemental to a DB provision within the plan does not require the 1% minimum.

However, an MP provision under a combination plan has to contain the 1% minimum employer contribution rule if plan members are allowed to only participate in the MP provision under the plan.

Cross references:

Definition of active member – 8500(1)
Maximum Employer Contributions – 147.1(8) & (9)
IC72-13R8, Employees’ Pension Plans
Newsletter No. 91-4R, Registration Rules for Money Purchase Provisions

14.2.2 8506(2)(b) – Employer contributions with respect to particular members

The plan terms must be clear to ensure that a participating employer can only contribute amounts that are in respect of employees or former employees who are members of the plan. This requirement is designed to prevent unallocated contributions to the plan.

Cross references:

Definition of member – 147.1(1)
Definition of participating employer – 147.1(1)
Allocation of employer contributions – 8506(2)(b.1)

14.2.3 8506(2)(b.1) – Allocation of employer contributions

Employer contributions have to be allocated to the member with respect to whom they were made.

14.2.4 8506(2)(c) – Employer contributions not permitted

While there is either surplus, unallocated pre-1990 forfeitures or earnings related to the forfeitures, within an MP provision of an RPP:

Plan text

When a DB provision has been converted to or replaced by an MP provision, and whether any DB surplus has been transferred for application against the employer's obligations for contributions under the MP provision, the plan must state that no contributions will be made until the surplus is used up.

Otherwise, the plan may be silent regarding employer contributions not being permitted under, or a DB surplus not being transferable to, an MP provision when there exists a surplus or unallocated pre-1990 forfeitures or related earnings under the provision.

Cross references:

Transfer of surplus – DB to MP – 147.3(4.1)
Transfer where MP replaces DB provision – 147.3(8)
Pension credit MP provision – 8301(4)
Transfer of property between provisions – 8502(k)
Newsletter No. 94-2, Technical Questions and Answers

14.2.5 8506(2)(c.1) – Contributions not permitted

Contributions or amounts transferred from another RPP are not permitted for a member after the calendar year in which he or she turns 71. This also includes any forfeited amounts or surplus that could be allocated to a member.

Only amounts transferred under subsections 146.3(14.1), 147.3(1) and 147.3(4) of the Act are permitted.

14.2.6 8506(2)(d) – Return of contributions

MP plans have to contain a stipulation that allows a contribution to be refunded to the contributor to avoid revocation of the plan. The stipulation can be qualified to make the refund subject to the approval of the authority administering the federal or provincial pension benefits standards legislation, as applicable.

Grandfathered plans

An existing plan is exempt from having to contain this stipulation.

Cross references:

Stipulation Not Required for Pre-1992 Plans – 8509(10.1)
Designated Laws – 8513

14.2.7 8506(2)(e) – Allocation of earnings

The earnings related to the MP provision's assets have to be allocated at least annually and on a reasonable basis to plan members.

Plan text

Plans must provide that the allocation of earnings is to be done at least annually. The plan does not specifically have to state that the allocation is to be done on a reasonable basis. A method is considered reasonable if it involves some form of proration (for example allocation of earnings on a basis that is proportionate to the amount in each member's account).

14.2.8 8506(2)(f) – Payment or reallocation of forfeited amounts

This paragraph requires each forfeited amount (and associated earnings) be paid out to employers or reallocated to other members of the plan by the end of the year following the year the forfeiture arose. The Minister may, however, permit a later date under subsection 8506(3) of the Regulations.

Forfeited amounts reallocated to other plan members within their MP accounts are included in the member’s pension credit, as defined in subsection 8301(4) of the Regulations, and therefore are limited to the PA limits in subsections 147.1(8) and (9) of the Act. An exception to the preceding is forfeitures in respect of periods prior to 1990 that were reallocated before 1991.

Additionally, forfeitures paid directly to plan members, and not allocated to their MP accounts, are excluded from the member’s pension credit and therefore are not included in a PA calculation. The amount paid, however, must be brought into taxable income by the member in the year received, and is ineligible for a direct tax-free transfer to another registered plan. Forfeitures made from the plan and paid directly to the employer must be brought into income by the receiving employer.

Finally, forfeitures (and earnings) may be used to cover administrative, investment, and similar expenses incurred in connection with the plan.

Plan text

Plans must provide that any forfeited amounts and related earnings will be paid or reallocated by the end of the year following the year in which they arose

Cross references:

Pension Credit – MP Provision – 8301(4)
Payment from Account – 8506(1)(f)
Extension of timeline for Reallocation of Forfeitures – 8506(3)

14.2.9 8506(2)(g) – Retirement benefits

Plans must state how the retirement benefits will be provided. Retirement benefits payable under an MP provision have to be provided by the purchase of an annuity from a licensed annuities provider.

Paragraph 8506(2)(g) of the Regulations does not apply to the variable benefits that are paid directly out of the member’s account under paragraph 8506(1)(e.1) or variable payment life annuity (VPLA) benefits paid from a VPLA fund under paragraph 8506(1)(e.2) and subsection 8506(13).

We will no longer be allowing for other arrangements that are acceptable to the Minister. Plans that have been approved before February 27, 2004, will remain acceptable.

It is only the retirement benefits that have to be provided through an annuity – funding for an MP provision is not restricted to insurance contracts.

14.2.10 8506(2)(h) – Undue deferral of payment – Death of the member

This paragraph requires that any lump sum amounts payable to a member's beneficiary are paid out as soon as practicable, which means at the very latest within one year of the member’s death. Plans may use the wording of this paragraph within the Regulations or be silent on this. If a time frame is mentioned, we will accept anything within one year as being practicable.

After 2003, funds may remain in the plan in order to pay variable benefits from the account to the specified beneficiary of the member, upon the death of the member.

14.2.11 8506(2)(i) –Undue deferral of payment – Death of a specified beneficiary

Any lump sum amounts payable after the death of the specified beneficiary should be paid out as soon as practicable after their death.

Plans may use the wording of this paragraph within the Regulations or be silent on this. If a time frame is mentioned, we will accept anything within one year as being practicable.

14.3 8506(2.1) – Alternative Method for Allocating Employer Contributions

The Minister may waive the requirement in paragraph 8506(2)(b.1) of the Regulations where each employer contribution made after April 5, 1994 is allocated to the member for whom it was made. The request for such a waiver must be made in writing by the plan administrator. Also, the manner in which the employer contributions are to be allocated must be acceptable to the Minister.

14.4 8506(3) – Reallocation of Forfeitures

The extension of the deadline imposed under paragraph 8506(2)(f) of the Regulations can only be granted when the forfeited amounts and related earnings are to be:

The administrator must apply for an extension in writing and outline the circumstances for the delay.

14.5 8506(4) – Non-Payment of Minimum Amount – Plan Revocable

Subsection 8506(4) of the Regulations applies to plans that allow for the payment of variable benefits from members’ accounts. If the minimum amount is not paid or is less than what is required to be paid under subsections 8506(5) and (6), the plan becomes revocable.

Cross reference:

Variable Benefits – 8506(1)(e.1)

14.6 8506(5) – Minimum Amount

Subsection 8506(5) of the Regulations defines the minimum annual amount that must be paid to the member from his or her account. The calculation of the minimum amount is similar to how it is calculated under RRIFs. The minimum amount is determined by the formula A x B, where:

Factor “A” is the balance in the member’s account at the beginning of the year.
Factor “B” is the designated factor, under subsection 7308(4) of the Regulations. The factor can be based on the member’s age or the age of the member’s spouse or common-law partner.

The payment schedule can be changed in situations where the marital status of the member has changed. For example, if the member gets married after he or she started receiving variable benefits, and his or her spouse is younger, the designated factor can be based on the age of the spouse, provided that the terms of pension plan permits the change.

Any amounts that were used to purchase an annuity or transferred out of the member’s account are not to be considered for the purposes of determining the balance in the member’s account.

14.7 8506(6) – Determination of Account Balance

Subsection 8506(6) of the Regulations provides the methodology for determining the “A” factor (i.e. the balance in the member’s account at the beginning of the year), for the purpose of determining the minimum amount under subsection 8506(5).

Specifically, there must be a reasonable estimate of the fair market value of the property held in the member’s account at the beginning of the year, including an estimate of any unallocated earnings from the preceding year that can be expected to be allocated to the member’s account in the current year.

If an MP plan provides members with LRBs as well as variable benefits, then the property within the member’s account for the purpose of providing an LRB is excluded from the “A” factor for the purpose of calculating the minimum amount under subsection 8506(5) of the Regulations.

Cross reference:

Minimum Amount – 8506(5)

14.8 8506(7) – When the Minimum Amount is Nil

Subsection 8506(7) of the Regulations was added to be consistent with the rules for RRSPs and RRIFs. The minimum amount does not have to be paid out of the plan until the year in which the member turns 72.

Paragraph 8506(7)(b) of the Regulations was added so that the minimum amount for 2008 was reduced by 25%, consistent with the 25% reduction in RRIF minimum annual amount for 2008, as provided for in subsection 146.3(1.1) of the Act.

14.9 8506(8) – Specified Beneficiary

Subsection 8506(8) of the Regulations defines the term specified beneficiary of a member as his or her surviving spouse or common-law partner. The plan administrator must be advised before the beginning of the year to be able to designate the individual as a specified beneficiary.

The specified beneficiary is entitled to continue to receive the variable benefits from the member’s account for the remainder of his or her life.

14.10 8506(9) and (10) – Adjusted Minimum Amount for 2008

Subsections 8506(9) and (10) of the Regulations provided rules to allow individuals to make a re-contribution to the RPP of certain variable benefit payments received from the RPP in 2008. This re-contribution was permitted due to the 25% reduction in the minimum annual amount for 2008.

14.11 8506(13) - VPLA fund

Beginning January 1, 2020, paragraph 8506(1)(e.2) of the Regulations permits an MP provision to pay VPLA benefits out of a VPLA fund of the plan.

A VPLA fund under an MP provision of a pension plan is an arrangement that meets the following conditions:

Cross-references:

Payment of Pension – 8502(e)
Variable payment life annuity – 8506(1)(e.2)

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