November/December 2006: by Darrell Nordstrom

Rewarding key employees - deferred profit sharing plans

Hiring and retaining key employees is a common area of discussion among owner/managers these days because of the "boom" occurring and the out-migration of our labour force.

There are many issues surrounding this problem that need to be addressed when working towards a solution. The starting point may be the recognition and appreciation of the integral part the employees play in the success of the business. Then, and only then, can some of the strategies be put in place to provide answers.

Pension plans, employee group insurance programs, group RRSP's, bonuses, Christmas parties, tools, equipment and many other "perks" all add value to the total employment package and go a long way to establishing a positive corporate culture. A less common alternative that has particular advantages is a Deferred Profit Sharing Plan (DPSP).

As the name suggests, a DPSP distributes (or shares) some of the profits that the corporation earns every year with key employees. The first feature of these programs is that they form part of the employees' retirement program and should be integrated with other retirement programs, if they exist. From an employee's perspective, this is "found" money because all the contributions are made by the employer and all the funds have to be for, or on behalf of, employees. The employer cannot be a beneficiary of the plan.

The funds deposited to the DPSP do not show up as wages and therefore no CPP, nor any EI costs are associated with these programs.

Amounts deposited to the DPSP will directly offset the amount that can be contributed to an RRSP, so the 18% of earnings to a maximum of $18,000 still applies for overall tax deductible, tax deferred retirement savings vehicles.

Another feature of the DPSP is the ability to include a vesting period of up to 2 years, which provides some incentive for employees to remain with the business. Any employee leaving prematurely leaves the funds behind in the program.

Another useful characteristic of the DPSP is that it can be used to reward key employees and usually would NOT be offered to every employee. This ability to pick and chose allows the employer to reward outstanding performance from the best employees without the obligation to provide similar to contribute if there are losses. This is an obvious advantage compared to registered pension plans.

DPSP programs follow the same investing rules as RRSP's, so there are no restrictions, nor shortage of options. Regardless, it may be advisable to follow a well-diversified, balanced approach to streamline the operation of the program and to focus on the long-term goal of providing secure retirement income.

The DPSP program would be designed to prevent withdrawals as long as the individual remains an employee, a similar feature of a registered pension plan. Upon leaving, the employee is allowed to transfer all vested funds to an RRSP, another DPSP, or an RPP on a tax-free, rollover basis. The employee would also be allowed to receive the funds in cash upon termination, although this would be a taxable event.

DPSP's do require the proper paper work and registrations to establish the program, which is a disadvantage when compared to group RRSP's. However, the good news is that organizations do exist that will provide all the necessary administration features without charging any set up, trustee or administration fees. Of course, this necessitates using that same organization for investment purposes, which is not a problem as many attractive choices exist. The investments would be provided based on no front-end fees, no back end fees, and just an annual on-going management fee that is the same cost as buying any retail fund.

The advantages to the employer and employee are straightforward:

• No CPP costs
• No EI costs
• Deposits during profitable years only
• Rewards only key employees
• 2 Year vesting rules
• Enhanced retirement benefits

DPSP's may not be for everyone. On the other hand, they do merit consideration.

. . .
About the author
Darrell Nordstrom, CFP, RFP, CLU, CHFC, is a Senior Financial Advisor with Assante Financial Management Ltd. He can be reached at 1-877-837-3377 or 306-665-3377, or click to email Darrell Nordstrom.

Disclaimer
Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

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