Let's Talk: Deferred Profit Sharing Plan (DPSP)

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Have you ever been offered a Deferred Profit Sharing Plan (DPSP) when starting a new job? Have you ever wondered what it even means? Let's dive into it today for a better understanding!

How Does It Work?

DPSP is essentially another type of RRSP. They work a little differently but there are some overlapping features. First off, if a company makes a profit, hence the name, they can decide to distribute it to their employees. Only your employers can make contributions to your DPSP. If the company doesn't make a profit, the employers aren't required to contribute to your DPSP if they don't want to. In comparison to RRSP, there is less control from the employee's side.

 Your DPSP will grow tax-deferred similar to an RRSP until withdrawal. It's also important to know that the DPSP shares the same contribution limit as your RRSP. This means if your employer contributes to your DPSP, you will have less room to contribute to your RRSP. This is known as pension adjustment. Additionally, the contribution your employer makes is usually vested. This means that you need to work for a minimum period of time to keep the funds in the DPSP. This period is usually 2 years but can vary for some companies. If you left your job before the time requirement, your employer is entitled to all the funds back from your DPSP.

 You're probably wondering if it's even a good idea to start a DPSP. It honestly depends but here's a list to help you make an informed decision.
Pros:
  • No contributions on your end required
  • Another option to save for retirement
  • The vesting period is relatively short
  • Tax-deferred growth
Cons:
  • Company not required to contribute if they don't make any profit
  • Cannot contribute to spousal RRSP for a tax deduction
  • You may have limited options for investing
  • Shares your RRSP contribution room

Why Though?

DPSP is a great program to help employers stay competitive and retain their employees. DPSP and group RRSPs are the most popular choices these days because they are both cheaper compared to running a pension program. Employers also receive a tax deduction for contributing to their employee's DPSP. This will help them lower their taxes at the end of the year. It's in the employer's best interest to contribute for these reasons alone. Not doing so would most likely affect their employee's retention and leave them with a higher tax bill. At the end of the day, it is essentially free money from your employer to help you save for retirement if you have trouble saving.




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