When withdrawing from a DPSP, also known as a Deferred Profit Sharing Plan (DPSP), make sure that your vesting period has passed. If you’re wondering what a vesting period is, we’ve detailed it below.
To recap, a DPSP is a registered investment vehicles set up by the employer for the benefit of the employees. The plan encourages employers to share the business’s profits with employees by contributing into the deferred profit sharing plan on a periodic basis.
DPSP contributions have a maximum vesting period of up to two years or 24 months. Vesting period could be less, depending on the plan policy. The vesting period was created in order to encourage employee tenure. Once the vesting period has passed, funds in the DPSP can be withdrawn, discussed below.
Pension Adjustment Reversal
If the employee leaves the plan before the vesting period has passed, they will forfeit the employer’s contributions and a pension adjustment reversal (PAR) will be triggered. A pension adjustment reversal is the opposite of a pension adjustment. The employee’s RRSP contribution room will increase by the amount that they forfeited. PAR will be reported on a T10 slip.
Withdrawing from a DPSP
Upon maturity of the vesting period, the employee can start withdrawing from a DPSP or leave the funds in the plan.
Withdrawal Options
When withdrawing from a DPSP, be aware of the various options presented to you, such as:
- Lump Sum Withdrawal – the employee can choose to receive the funds in the DPSP in cash but the cash received is considered taxable income
- Transfer to an RPP, RRSP RRIF – DPSP funds can be transferred tax free to the aforementioned registered accounts. Your RRSP contribution room is not affected as when you deposited the funds, a pension adjustment was triggered
- Purchase an annuity – The employee can choose to purchase an life annuity or term annuity not exceeding 15 years
- Transfer to another DPSP – Funds can be transferred to another DPSP if that particular plan has at least 5 beneficiaries
- Annual Payments – The employee can choose to receive equal annual payments over a course of 10 years.
Termination/Death of Employee
When withdrawing from a DPSP due to termination or death of an employee, be mindful of the grace period allowed to proceed with the withdrawal. If the employee participating in the Deferred Profit Sharing Plan is terminated from employment, becomes deceased or turns age 71, the vested amounts must be paid to them or their estate, no later than 90 days.
Upon death of the employee, funds accumulated in the DPSP can be transferred into an RPP, RRSP or RRIF if the beneficiary is the spouse or common law partner.
