With much anticipation after the introduction of Bill 56, An Act to require the establishment of the Ontario Retirement Pension Plan in 2014, the Ontario government recently unveiled details on the new Ontario Retirement Pension Plan (“ORPP”) that have clarified the impact of the ORPP on employers.
The goal of the ORPP is to ensure every employee in Ontario receives a predictable stream of income in retirement. In order to achieve this goal, every employee must participate either in the ORPP or in a “comparable” workplace pension plan by 2020.
The ORPP will be a “defined benefit” plan requiring each of the employee and employer to contribute 1.9% of an employee’s annual earnings up to $90,000. This works out to $2.16 contributed per day by each of the employer and employee for an employee earning $45,000 per year; and $4.50 per day each for an employee earning $90,000 or more per year. The maximum earnings threshold will increase each year, mirroring the increase to the maximum earnings threshold under the Canada Pension Plan.
The ORPP is a mandatory program requiring the participation of all eligible Ontario employees (except those with comparable workplace pension plans). All employees over the age of 18 earning an annual salary above an as-yet unannounced prescribed minimum threshold will be required to participate. Individuals who are self-employed or employed in federally regulated sectors, such as banking, transportation and telecommunications, are not eligible for participation in the ORPP.
The only exception to participation in the ORPP is where an employee participates in an employer-sponsored “comparable” pension plan. A “comparable” plan under the ORPP refers to a registered plan that is subject to federal and provincial pension legislation and has minimum contribution thresholds. For example, a defined benefit plan, defined contribution plan or hybrid defined benefit and contribution plan would qualify as a “comparable” plan, provided it meets certain minimum requirements, while other arrangements, such as a group registered retirement savings plan or deferred profit sharing plan, are not comparable.
For a defined benefit plan to be considered “comparable”, the plan must meet a minimum annual benefit accrual rate of 0.50% of an employee’s salary. A defined contribution plan qualifies as being comparable where there is a minimum annual contribution rate of 8% of an employee’s salary and the employer matches at least 4%. The government has developed formulas to determine the comparability of hybrid defined benefit and defined contribution plans.
The ORPP will be rolled out in 4 stages, beginning with the largest employers in 2017:
- Large employers (with 500 or more employees) without a registered workplace pension plan are required to contribute starting January 1, 2017;
- Medium employers (with 50 to 499 employees) without a registered workplace pension plan will be required to contribute starting January 1, 2018;
- Small employers (with 50 or fewer employees) without a registered workplace pension plan will be required to contribute starting January 1, 2019; and
- Employers with a workplace pension plan that is not a “comparable” and employees who are not members of their workplace’s “comparable” pension plan will be required to contribute starting January 1, 2020.
To give employers time to adjust to the ORPP, contribution rates for large, medium and small employers will be phased-in to eventually reach the combined 3.8% contribution rate for employers of all sizes by 2021.
We recommend that employers of all sizes should start to make the necessary preparations before ORPP arrives as employers now have the opportunity to weigh their options. Employers without a workplace pension plan will either need to organize their operations to ensure they will be able to make required contributions or put in place a “comparable” pension plan prior to the start date of required contributions.
Employers with existing retirement plans need to take a look at their plans to assess whether their plans qualify as “comparable”. Where an employer’s existing retirement plan does not meet the ORPP’s “comparable” threshold, the employer must choose between participating in the ORPP or re-designing its existing plan to meet minimum thresholds. Some employer-sponsored pension plans exclude coverage of certain employees, and employers should be aware that the ORPP requires all employees to receive coverage under some arrangement. This means employers either need to change these plans to ensure all employees participate or opt to participate in 2 pension plans by enrolling these excluded employees into the ORPP, depending on what makes sense for the business.
Employers will be contacted in early 2016 by the Ontario Retirement Pension Plan Administration Corporation, the administrator of the ORPP, to verify whether there is an existing pension plan and determine whether there is adequate coverage provided.
Even with these details, there are still several unanswered questions relating the definition of an employee and the tax treatment of ORPP, and when there are further developments from the Ontario government, Williams HR Law will keep you apprised.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.