# DB Pension - Employee Contribution Option Tax Treatment?



## peterk (May 16, 2010)

I am provided a DB plan at my work. The employer pays 100% of the monies towards it and I don't have to contribute or be involved in any way.

In addition to this, I am allowed to contribute 3% of my earnings towards the DB plan, which upon my retirement will purchase additional cash flow such as 3% indexing, or increased bridge benefits, etc. This is called the Employee Contribution Option (ECO), which I am considering to begin making contributions to.

This ECO contribution is tax deductible at source (paycheque) and is tranferred to a locked account at Sunlife under my name, where it sits and earns the CANSIM interest rate until I retire or resign.

When I resign, the DB pension and ECO are locked together. If I choose the deferred pension, I must leave the ECO in-plan and receive the additional benefits at age 65. If I want to cash out the DB pension to a LIRA, I must also cash out the ECO, which gets tranferred to personal RRSP.

Now my quesiton is: If I cash out the pension, the ECO gets transferred to a personal RRSP. Do I need available RRSP room to make this contribution, or does this act as a pension transfer and keep my existing RRSP room intact?

I have asked my benefits department at work and they have said it is the latter.

I am slightly concerned, because it seems that if this is a pension transfer like they say, then why is this ECO money not tranferred directed to a LIRA? Additionally, as part of the plan rules, I am allowed to withdraw the funds fully from the ECO to a personal savings account and pay tax on it, if I so choose (foolish option). This seems to support the idea that this is NOT a pension transfer, and simply a withdrawl from a savings account.

I will trust the benefits department if no one knows the answer or hasn't dealt with this kind of pension account before. But I was hoping someone from CMF would be able to verify for me. It makes all the difference whether this cash out transfer creates "new" RRSP room, like a LIRA would, or not. If I am mistaken about how this works I'll be out thousands of dollars to the government and it would NOT have been worth opening this ECO account in the first place.

EDIT: I forgot the most important point of this plan... The ECO contribution, while tax deductible at source, does NOT reduce personal RRSP contribution room for that year. So you can see my dilemma. This ECO is like a DB, DC, and Savings plan had a baby, and I can't make heads or tails of how it is to be handled vis a vis tax treatment and RRSP room.


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## fraser (May 15, 2010)

I had a similar plan. I contributed the 3 percent extra because my employer matched it by half, ie 1 1/2 percent. Not sure if I would have considered participation without the employer match. We were able to manage the Sun Life account and select our choice of investment vehicle within their offerings. Cannot comment on pension transfer as I took retirement. I used the monies to enhance my pension between age 61 and age 65 and to offset the survivor costs.


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## peterk (May 16, 2010)

Thanks Fraser. I have that aspect of my pension as well but didn't mention it here. Same as you, 1.5% matching contributions, managed by the employee through sunlife. This part of the plan is clearly a small DC supplemental pension, and affects RRSP limits as well as transfers out to a LIRA upon termination. The ECO is something separate though. Something I'm having difficulty understanding how it fits into the RPP.


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## fraser (May 15, 2010)

When I took my pension, I used the money to increase my pension payments from age 61 to 65 as well as offsetting the cost of survivor benefits on the pension. The monies are certainly taxable when paid. 

My understanding is that these additional payments will not impact your RRSP room should you subsequently leave the plan. The monies will of course be rolled over into a registered plan.

My employer enhanced our DB plan in 1997. I spoke to a pension consultant at the time and his feeling was that these hybrid plans were very good and that they fully took advantage of the CRA tax provisions. I also had a supplementary pension plan. The company 1 1/2 percent match of this portion was paid to me in one lump sum when I retired and oddly enough it came across as earned income, ie subject to CPP. 

What amazed me is that even though we did not contribute towards our DB pension, many employees did not sign up for the 3 percent extra even though they got an immediate 1 1/2 percent match. Some did not even bother to read the documents let alone attend the pension update sessions presented by the pension consultants. As a manager, I encouraged them to do so. Our employer provided these benefits and wanted employees to take advantage of them.


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## peterk (May 16, 2010)

Ok then perhaps we are talking about the same thing! Good to know.

Not a single person I've spoken to at work has signed up for the ECO. Most are bright enough to be enrolled in the Supplemental matching program of the pension, but many also do not. Generally they cite not wanting to lock away their money (a measly 1.5% off the top) even though they know they are throwing away 100% matching from the company.... Madness!


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## fraser (May 15, 2010)

I signed up for everything and got all of the benefits that I was offered. Twenty five years later I was very pleased that I had. It made a difference and I did not really notice the optional monies that were deducted.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> ... This is called the Employee Contribution Option (ECO), which I am considering to begin making contributions to.
> 
> This ECO contribution is tax deductible at source (paycheque) and is tranferred to a locked account at Sunlife under my name, where it sits and earns the CANSIM interest rate until I retire or resign.
> 
> ...


Usually when a pension is locked, it's locked regardless of choice ... so I suspect the "when I resign" is not really locking both.




peterk said:


> ... Now my question is: If I cash out the pension, the ECO gets transferred to a personal RRSP.
> Do I need available RRSP room to make this contribution, or does this act as a pension transfer and keep my existing RRSP room intact?
> 
> I have asked my benefits department at work and they have said it is the latter.
> ...


I suspect it is because it is 100% your money and is not needed for the base benefits but for optional upgrades.


I've left two DB pensions.

For the first DB pension, more was collected as employee contributions than was needed to pay the benefit earned. So for that portion, after deciding to take the money out of the DB pension, I could transfer the excess employee contributions to my RRSP or take it as cash and pay any income tax owing. 

Since I wasn't silly enough to want the tax deferred money as cash/additional income, the result was a LIRA for the employer/employee contributions that matched the benefit and a transfer to my RRSP for the excess employee contributions.

For the second DB pension, the employer/employee contributions matched the benefit so that 100% of the proceeds went into a LIRA. 




peterk said:


> ... Additionally, as part of the plan rules, I am allowed to withdraw the funds fully from the ECO to a personal savings account and pay tax on it, if I so choose (foolish option). This seems to support the idea that this is NOT a pension transfer, and simply a withdrawal from a savings account...


It is a pension transfer as it is coming from a pension plan.
The option to take it as income including paying any required income tax confirms that it is tax deferred money. As I understand it, the ability to take it as income is confirming it's excess money that isn't required to pay the defined benefit.




peterk said:


> ... I will trust the benefits department if no one knows the answer or hasn't dealt with this kind of pension account before. But I was hoping someone from CMF would be able to verify for me...


It wasn't the same account but I have had a similar experience. I'll see if my friend who has access to a similar account is willing to share the details.




peterk said:


> ... It makes all the difference whether this cash out transfer creates "new" RRSP room, like a LIRA would, or not... EDIT: I forgot the most important point of this plan... The ECO contribution, while tax deductible at source, does NOT reduce personal RRSP contribution room for that year


Based on my experience and reading, you are mistaken ... there is no "new" RRSP room being created by a LIRA or a transfer to an RRSP. Both the DB pension and the ECO *are* reducing your RRSP contribution limit.

When you put the money into the DB pension, a pension adjustment (PA) is added to your T4 to reflect the pension credits you've earned during the year. For a DC (defined contribution) pension this will be dollar for dollar (i.e. $1 employee and $1 employer = $2 PA).

But in a DB pension, the benefit is guaranteed so that the DB pension PA is calculated as [(9 x annual accrued benefit) – 600]. 

CRA says:


> Your PA for a year is the total pension credits for the year under a DPSP or a defined benefit or money purchase provision of an RPP of which you are a member... The pension credit is a measure of the value of the benefits that accrued to you during the year under these arrangements...
> 
> What does your PA affect?
> *Your PA for a year reduces your RRSP deduction limit for the following year.*


http://www.cra-arc.gc.ca/E/pub/tg/t4040/t4040-e.html#P2722_98650


The reason you are not seeing your RRSP contribution room going down is that CRA has already sliced off the matching amount - before telling you the final RRSP contribution room earned in the current year. 

Or to put another way, the adjustment for your pension is part of calculating what room was earned in the current tax year.


Think about it ... if this adjustment was not happening, people in a pension would have a big advantage. They would the pension benefits plus the full RRSP contribution room. Someone without a pension would have the RRSP contribution room only.


I don't know the details of your DB pension, so I'll use my second DB pension to illustrate with rough numbers.

I contributed $2K, the company contributed $2K for a total of $4K. The PA was $7K.
Based on 18% x earned income, I should have earned $12K in RRSP contribution room. 

Subtracting the PA means $12K RRSP contribution room earned - $7K PA for a final amount of only $5K RRSP contribution room earned. This matched my NOA for that tax year, with added $5K to the overall RRSP contribution limit.


Some links:
http://www.milliondollarjourney.com/what-is-the-pension-adjustment-pa.htm#DGQ4ijxW7JwIcfc2.99
http://www.advisor.ca/retirement/retirement-news/area-52-know-your-pension-adjustments-45085
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/206/menu-eng.html

Cheers


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## peterk (May 16, 2010)

Eclectic12 said:


> It is a pension transfer as it is coming from a pension plan.
> The option to take it as income including paying any required income tax confirms that it is tax deferred money. As I understand it, the ability to take it as income is confirming it's excess money that isn't required to pay the defined benefit.
> 
> 
> ...


I agree completely, and thanks for the detailed response. However, I still don't think I've got to the final answer just yet.

The following is quoted from my retirement manual at work:



> If you elect to participate in the ECO, you contribute 3% of your pensionable earnings each year for the current year of service. These contributions are fully tax-deductible and do not affect the amount you can contribute to the Group Registered Savings Plan (GRRSP) or any other personal Registered Retirement Savings Plan (RRSP). You may contribute additional amounts each year for past service, but the deductibility of these past service contributions depends on your personal situation.
> 
> Your contributions are tax-sheltered like other registered accounts - they earn interest each year and you do not pay income tax on the interest.
> 
> ...





> IF I LEAVE BEFORE RETIREMENT? If you leave before retirement, the balance in your ECO account may be transferred to your personal Registered Retirement Savings Plan (RRSP). The transfer is not subject to withholding tax. Alternatively, you may elect a cash refund, which is taxable as income.



The following emails were exchanged between myself and my benefits department:



> Benefits -
> "Upon termination a member has the option to move out their ECO to their individual RRSP (As long as they move out their BRP)
> This is considered a pension transfer and as such the member does not need to have RRSP room available."
> 
> ...


So as you can see. It is considered a pension transfer, and is a deductible contribution at source, and yet there is no PA applied to the contribution (stating that RRSP room is not affected definitively means there is no PA, doesn't it?) and can be transferred out to an RRSP (not LIRA) without needing RRSP contribution room.

In essence, something doesn't jive. Either the benefits person is wrong, or I (and others seemingly) am not aware of this uncommon way of saving additional funds in a pension account without the corresponding PA. 

I want to make sure I get this correct so I don't end up getting dinged by CRA years down the road by having to use available RRSP room to make the ECO transfer, which would essentially make the entire ECO account of no benefit.


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## fraser (May 15, 2010)

As an aside, don't forget to audit your plan once in a while. We went through 2 mergers. At some point I did an audit of my Sun Life account. It took about 15 minutes to discover that the employer 1 1/2 percent matching had was NOT being made and had not been made for several years. The result was an $8K plus interest adjustment. This amount, plus forward investment earnings on it, was eventually paid out as a LIRA. Bottom line, it pays to audit your statements. Inadvertent mistakes can easily occur.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> I agree completely, ... (stating that RRSP room is not affected definitively means there is no PA, doesn't it?) ...


I'm not following how you can agree and make this statement ... so I'll take it one or two steps at time.

No .... not affecting RRSP room does not tell one anything about a PA.

Case in point ... the company I left where I had my first DB pension.

I requested a transfer of the DB pension, which had a PA. It did not affect my RRSP contribution room where part went into a LIRA and part went into an RRSP (these were two different account numbers at the same broker).

I also transferred a Group RRSP which did not have a PA that also went into the RRSP (the RRSP account number at the same broker).


"Not Affecting RRSP Contribution Limit" doesn't tell one anything about a PA.


Agreed?


Cheers

*PS*

All that "not affecting RRSP contribution" tells one is that both sides of the transfer are tax deferred.


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## peterk (May 16, 2010)

Thanks Eclectic! I am sure you are right, but I don't follow...

In your example you are talking about a transfer out of the pension after the PA had already been applied during the year of contribution, and thus wasn't affecting your RRSP room when withdrawing from the pension plan. In my example I am depositing funds _into_ the plan and expecting there to be no PA based on being told that RRSP room will not be affected by ECO contributions.

In the plan guidelines for my SRP (DC) pension, it states that "contributions will reduce the amount of personal RRSP room". For the ECO it states "contributions will not reduce the amount of personal RRSP room available"

Can this mean anything other than "a PA applies toSRP contributions and PA doesn't apply to ECO contributions"?

They can't say that RRSP room will not be affected and then apply a PA... that would be false wouldn't it?

I must not be getting something...


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## Eclectic12 (Oct 20, 2010)

peterk said:


> ... I don't follow ... In your example you are talking about a transfer out of the pension after the PA had already been applied during the year of contribution, and thus wasn't affecting your RRSP room when withdrawing from the pension plan.


I was pointing out that my pension transfer was an example where the RRSP contribution limit was stated to not affected plus could be transferred out to a LIRA/RRSP yet did have a PA.

This seemed to be the criteria you were using to determine if there was or was not a PA ... perhaps I misunderstood.




peterk said:


> In my example I am depositing funds _into_ the plan and expecting there to be no PA based on being told that RRSP room will not be affected by ECO contributions.


Let me put it another way ... it depends here on what is meant by "RRSP room".

For my DB pension that has a PA, I received my 2014 RRSP Deduction Limit statement after my 2013 tax return was processed as part of the NOA. Say my 2014 RRSP room is $5K. The DB pensions contributions *won't* change this amount as the PA for 2013 has already been applied and the PA for 2014 won't be applied until 2015.

Without "RRSP room" defined with enough detail - the statement can be true and there can be a PA.




peterk said:


> In the plan guidelines for my SRP (DC) pension, ...


Is the "DC" a typo? 
Most DC pensions I know of do not have anything like the ECO described where DB pensions sometime do.




peterk said:


> ... it states that "contributions will reduce the amount of personal RRSP room". For the ECO it states "contributions will not reduce the amount of personal RRSP room available"
> 
> Can this mean anything other than "a PA applies to SRP contributions and PA doesn't apply to ECO contributions"?


It does not sound like it ... however, this also assumes the wording is being used consistently.

Probably your best bet is to point these two statements out and directly ask your benefits people "does this mean the pension has a PA and the ECO does not?"

You could look at your T4, box 52 to get the number but I believe you said you haven't joined the ECO so this would mean the current PA is for the pension only. 




peterk said:


> ...They can't say that RRSP room will not be affected and then apply a PA... that would be false wouldn't it?
> I must not be getting something...


It all depends on what the "RRSP room" number means and is coming from.

If it is the "201x RRSP Deduction Limit Statement" from CRA - this is an *after PA* number so that this year's pension contributions won't affect it but will generate a PA. 

Since most people equate "RRSP contribution room earned" with the "201x RRSP Deduction Limit Statement" from CRA - there's lot of room for confusion as there is a subtle difference.

For the purpose of what dollar amount can be contributed - the difference won't matter. For trying to figure out if a PA has been applied - it can be important.

Cheers


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## peterk (May 16, 2010)

Sorry for the SRP confusion. The ECO goes along with my DB pension. The SRP is the 1.5% matching savings plan. The "Supplemental Retirement Plan" which is in essence a small DC pension in additional to the main DB pension. It has no bearing on this ECO situation other than for my illustrating the different wording regarding RRSP contribution room between the two plans.

I think you are right. I will ask my benefits department directly if there is a Pension Adjustment associated with my contributions to the ECO.


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## Eclectic12 (Oct 20, 2010)

No worries on the confusion ... though it illustrates how easy it is for confusion to creep in! 

The benefits dept is the likely the best source ... you might have to be patient as most companies I've worked in had most versed in the booklet but for something this specific, I had to find the appropriate person.

If you know the formulas for everything that is adding a PA, you could use a "before joining ECO" and "after joining ECO" comparison. It isn't all that easy though as the pension benefits generating the PA are going vary a bit, year over year.


Cheers


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## peterk (May 16, 2010)

I've heard back from my benefits department and they say there is no PA for the ECO contribution.

So to summarize:

ECO is a 100% employee contribution to a DB pension which is used to buy pension benefits such as indexing or extra bridge benefits upon retirement.

Contributions are tax deductible at source against income
No PA is applied against the contribution
Tax Free interest is earned while deposited in plan
If withdrawn from plan (upon termination) the funds are transferred to a personal RRSP without the need to use RRSP room (like a LIRA transfer)

It still seems like this is incorrect, as it appears it is cheating the system and giving me all the benefits of a pension without affecting my RRSP limit.

:confused2:


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## gardner (Feb 13, 2014)

That doesn't seem right. In my view, the ECO should either be an optional boost to the DB plan, which increases the value of the DB and should have an effect on the PA, or it is a parallel DC plan which would generate RRSP deposits that you would have to report alongside your other deposits -- and watch lest you go over your PA-adjusted limit.

If it's as you say, it's an interesting animal indeed.


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## peterk (May 16, 2010)

I am asking for further clarification still from the benefits department. They are really going to love me up there haha.


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## fraser (May 15, 2010)

My employer changed our DB plan in 1997 and among other things added this 'hybrid' component. The consultant at the time said it was a very good idea however I did not realize that it was not accounted for in the PA. As I understand it, the 3 percent is limited to CRA maximums, about 3K. Anything for employement income over that was placed into our SERP.


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## Eclectic12 (Oct 20, 2010)

peterk said:


> ... It still seems like this is incorrect, as it appears it is cheating the system and giving me all the benefits of a pension without affecting my RRSP limit.
> 
> :confused2:


Weird ... my friend is asking his benefits person as for his similar plan - the maximums were just reduced as the company/employee contributions to the DB plan have been boosted. The only connection he can think of is the PA.

Lots of holidays around now so it may be a while before he receives an answer.


Like you ... it sounds too good to be true as 3% of income could be a substantial amount.


Cheers


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## Beaver101 (Nov 14, 2011)

gardner said:


> That doesn't seem right. In my view, the ECO should either be an optional boost to the DB plan, which increases the value of the DB and should have an effect on the PA, or it is a parallel DC plan which would generate RRSP deposits that you would have to report alongside your other deposits -- and watch lest you go over your PA-adjusted limit.
> 
> If it's as you say, it's an interesting animal indeed.


 ... +1



> *peterk:*I am asking for further clarification still from the benefits department. They are really going to love me up there haha.


 ... how about going directly to the plan administrator (or the pension expert) for the official details?


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## peterk (May 16, 2010)

Straight from the horse's mouth (pension advisor):



> Hi Peter
> 
> No you are not missing something.
> 
> ...


I think I have enough understanding to move forward with it and enroll in the ECO.

Thanks everyone for the input and well thought out responses that you clearly put a lot of time and passion into. I appreciate it.


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## Eclectic12 (Oct 20, 2010)

^^^

Good news for you!

I'm waiting to hear if my friend is in a similar advantaged position or his plan is more traditional with a PA.


Cheers


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