The hidden challenges of sponsoring group RRSPs

Plans save employers from pension legislation, but there's still an obligation to manage plan in good faith

"A penny saved is a penny earned.” Few employer-sponsored savings plans promote this philosophy better than a group registered retiring savings plan (RRSP). For every dollar saved by the employee and deposited into a group RRSP, companies often match this amount up to a specified limit.

The very design of a group RRSP places the ownership and accountability on the employee to manage the actual funds. The advantage for employers is no pensions and benefits regulatory bodies to register with and no pension legislation to adhere to. But employers aren’t completely off the hook.

Employers still have the obligation to manage the group RRSP plan in good faith. This includes the fiduciary responsibility to prevent employees from contributing more than their personal RRSP limit and administering the plan within capital accumulation guidelines.


In the T4001 Employers Guide — Payroll Deductions and Remittances, the Canada Revenue Agency (CRA) states that before reducing income tax withheld at source, “(employers) have to have reasonable grounds to believe that the (RRSP) contribution can be deducted by the employee for the year.”

Manual or automated surveillance of year-to-date and future RRSP contributions can be set up and maintained to avoid over-contribution, not unlike the way Canada Pension Plan (CPP) contributions are capped to the annual maximum. Employees who over-contribute risk a monthly one-per-cent tax liability on the excess that surpasses the once-a-lifetime over-contribution allowance of $2,000.

Subsections 204.1(a) and (b) of the Income Tax Act do provide measures by which the assessment of this tax may be relieved. This relief is granted where an employee is in an over-contribution situation and the reasons are beyond their control, such as participation in a mandatory group RRSP as a requirement of employment.

However, in response to a recent enquiry on the topic, CRA stated relief will not be granted unless reasonable arrangements are made to remove the excess or over-contributed amount from the particular plan. Withdrawing RRSP funds can result in a significant tax burden to the employee, not to mention a capital loss when withdrawals occur during an unfavourable market. Although an employer is not held directly responsible for any negative repercussions of an over-contribution, employees may act out their frustration through poor performance or seek compensation for their loss through union grievances or the courts.

CAP guidelines

Employers may also be held responsible for measuring the company’s group RRSP against regulatory guidelines, such as those issued by the Canadian Association of Pension Authorities (CAPSA). On May 28, 2004, the Joint Forum of Financial Market Regulators released a final version of their capital accumulation guidelines which have been approved for publication by CAPSA and adopted as CAPSA Guideline # 3, Guidelines for Capital Accumulation Plans.

According to these guidelines, the capital accumulation plan (CAP) sponsor is responsible for:

•setting up the plan (defining the purpose of the plan, deciding whether to use service providers and selecting service providers);

•providing investment information and decision-making tools to CAP members;

•introducing the plan to members;

•providing ongoing communication to members;

•maintaining the plan; and

•ensuring that termination of the plan or the membership of an individual within the plan is done in accordance with the terms of the CAP.

While these guidelines do not have the force of legislation, employers should note that they are increasingly seen as benchmarks against which an employer’s fiduciary duties are measured.

“The CAP guidelines represent industry best practices and the expectations of financial services regulators across Canada,” said David Wild, chair of the Joint Forum of Financial Market Regulators. “An employer that ignores the CAP guidelines will have a difficult time demonstrating that it has fulfilled its duty to its employees.”

Plan purpose

Consider the following: An orientation brochure elicits employees to join the company’s group RRSP to “ensure financial piece of mind upon retirement.” The plan, however, does not fund restricted access RRSP accounts and instead allows employees to freely make withdrawals of both employee and employer contributions. Restricted access RRSP accounts do not allow withdrawals except upon termination of employment or retirement, or under the first-time Home Buyer’s Plan or Lifelong Learning Plan. Such restrictions are established by the employer with the financial institution when setting up the group plan.

Without such restrictions, the purpose of the plan — to “provide financial piece of mind upon retirement” — is not being met. The allowance of RRSP withdrawals suggests that employer contributions are simply additional sources of income which the employee can access at will.

Whatever the plan’s purpose, it is the CAP member’s right to understand that group RRSPs cannot clearly define what retirement income will be upon retirement. As such, it is left to the employees to seek financial advice and to make choices in how their funds are invested.

Investment information

As baby boomers begin to retire en masse and convert their collective RRSP funds into retirement income funds (RIFs) or life annuities, companies may be faced with a growing number of retirees holding capital accumulation plans that result in little financial security and a lot of resentment toward the sponsor of the plan — the employer.

With employees becoming more versed about their legal and ethical rights, class-action lawsuits are quickly appearing in the Canadian legal landscape. As the CAP guidelines continue to gain currency in the domain of group RRSP sponsorship, employers would not want to enter a courtroom with major gaps in their internal CAP guidelines assessments.

“Any employee or widow of a retired employee, shivering in the dark, will be easily able to launch a plausible lawsuit against an employer who turned a blind eye to the CAP guidelines,” said Mary Picard, pensions partner at the Toronto office of the law firm Fraser Milner Casgrain LLP. “Whether in a PR basis or in the courtroom, you will not be able to defend yourself without your compliance with the CAP guidelines as your shield.”

Reviewing the current group RRSP policies and practices may be on the low end of a company’s to-do list since the CAP guidelines are not legislation. Seen as best practices, however, they do provide courts with a benchmark to determine if employers have fulfilled their fiduciary responsibility in managing the group RRSP plan should a dispute arise. A penny spent on an internal CAP assessment may earn the employer considerably more than a penny saved.

Rachel De Grâce is a payroll consultant with the Canadian Payroll Association. She may be reached at (416) 487-3380 ext. 126.

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