Supplemental Benefits
The Income Tax Act sets a ceiling on how much can be contributed to a pension plan on behalf of a member, and how much can be paid to a member under the member’s pension. Some employers provide additional benefits through supplemental pension plans. These are not registered under the ITA, nor usually under provincial pension standards legislation. These plans are often unfunded, and benefits are typically financed through company revenue. These benefits qualify as family property and rules for dividing them are set out in FLA, s 119.
A former spouse entitled to a share of benefits in a supplemental pension plan would become a limited member of the plan by sending the administrator a copy of the agreement or order dividing the benefits together with a Form P2. When the member’s benefits commence being paid, the limited member is entitled to receive a share in the form of a separate pension payable for the limited member’s lifetime. The separate pension would be determined in the same way as a limited member’s separate pension under a plan registered under the ITA (see Chapter 2). The only difference is that the former spouse is not automatically entitled to take the share by a lump sum transfer, or to take the separate pension before the member chooses to have the pension commence.
If the supplemental pension has already commenced by the time the relationship ends, the former spouse would become a limited member of the plan and receive a share of the income stream, in the same way as for a matured pension under a registered pension [SN1] plan (see Chapter 5).
Other options are available, with the consent of the plan administrator.
Benefits for Specified Individuals
The Income Tax Act permits pension plans to be set up for specified individuals (in general terms, a person who has 10% or greater ownership interest in the company, or who is related to the owner). The ITA also provides that any member earning more than a specified amount is also a specified individual, which means that non-connected high-income employees can also come within the definition of specified individual (in ITA Reg., s 8515(4)(b)).
One kind of plan for specified individuals is an Individual Pension Plan (one having three or fewer members). IPPs are becoming increasingly more popular and more common to encounter. IPPs can be set up to permit contribution amounts that exceed those permitted for defined contribution accounts, RRSPs and LIRAs.
A former spouse entitled to a share of benefits in a plan for a specified individual would become a limited member of the plan by sending the administrator a copy of the agreement or order dividing the benefits together with a Form P2. When the member’s benefits commence being paid, the limited member is entitled to receive a share in the form of a separate pension payable for the limited member’s lifetime. The separate pension would be determined in the same way as a limited member’s separate pension under a plan registered under the ITA (see Chapter 2). The only difference is that the former spouse is not automatically entitled to take the share by a lump sum transfer, or to take the separate pension before the member chooses to have the pension commence.
If the pension has already commenced by the time the relationship ends, the former spouse would become a limited member of the plan and receive a share of the income stream, in the same way as for a matured pension under other local plans (see Chapter 5).
Other options are available, with the consent of the plan administrator.
| 6.1 SPP | Members of our plan are entitled to supplementary benefits financed from company revenue. The additional benefits are based on the member’s average earnings and regular pensionable service and represent the amount over and above the maximum amounts CRA will allow to be paid under registered pension plans. Are these divisible? |
| Benefits in a supplemental pension plan are divisible under Part 6 [FLA, ss 119 and 110, definition of “supplemental pension plan”], but the rules that apply are different from those that apply to benefits in a registered local plan (which were discussed in Chapters 2 and 3). Under the FLA, the former spouse becomes a limited member of the plan and is permitted to receive the share of the benefits as a separate pension payable for the former spouse’s lifetime, when the member’s pension commences. The separate pension would be determined in the same way as a limited member’s separate pension under a registered pension plan (s[SN2] ee Chapter 2). Some supplemental pension plans are designed to pay out benefits for a limited time—10 years being common. The limited member would be entitled to the same choices available to the member, so in these cases, instead of a separate pension, the limited member would be entitled to a separate share payable over the same specified period. |
| 6.2 Why are options for dividing SPP restricted? | Why isn’t the former spouse entitled to choose to receive a separate pension at any time after the member is eligible to do that? If that option is fair for benefits in registered pension plans, why is it not appropriate for supplemental pension plans?[SN3] |
| The fact that other options are not automatically available recognizes that these types of plans are typically not funded, so requiring the administrator to pay out the former spouse’s share before the member’s pension commences could prejudice the plan, other plan members, or the plan sponsor. Any of the other options for dividing the benefits that are available with respect to registered pension plans[SN4] , however, are available with the consent of the administrator. [FLA, s 119(3)(a), (b) and (c)] | |
| 6.3 SPP is a DC Account | Our supplemental pension plan is set up on defined contribution principles. Notional contributions are made to the plan, and notional investment returns allocated to the defined contribution account. The former spouse is making a claim to a share of these benefits. Are they divisible in the same way as registered defined contribution accounts, by a transfer from the account to the credit of the former spouse? |
| No. The rules in s 114 that apply to defined contribution accounts are applicable to a supplemental pension plan only with the consent of the administrator. [FLA, s 119(3)] In most cases, where the plan is not funded, the administrator would not consent. Furthermore, a supplemental pension plan is not a registered plan and so transfer to a registered plan such as an RRSP or a LIRA is not available[SN5] . The former spouse must become a limited member of the plan and would be entitled to receive the share when the member’s pension commences (whether in the form of an annuity, installments over a specified period or withdrawals from the plan). At that date, the former spouse’s share would be payable as a separate pension (or by any of the other options available to members). If the administrator consents to an immediate transfer, it must be realized that because supplemental pension plans are not registered under the ITA, the rules that apply to the rollover of the tax incidences of registered pension benefits would not apply. The payment would be made to the former spouse in cash and subject to taxation in the year received. | |
| 6.4 Lifetime pension | The member terminated employment and is receiving benefits in the form of a lifetime pension. How does the former spouse receive the former spouse’s share in this situation? |
| S 117 applies. [FLA, s 119(3)(a)] The former spouse becomes a limited member of the plan and entitled to receive a proportionate share of the monthly benefit paid to the member until the earliest of the death of the member, the death of the former spouse and the termination of benefits under the plan. See, further, Chapter 5, with respect to the various issues that can arise in dividing a matured pension. The administrator is required to make separate tax withholdings for the parties. In any case where there is a conflict between the FLA requirement and the Income Tax Act, however, the ITA would apply to determine the administrator’s withholding obligations. If withholdings must be made from the member’s share that are attributable to payments made to the former spouse, the former spouse would be required to compensate the member. [FLA, s 141(1) and (2)] | |
| 6.5 Installment payments | The member terminated employment and is receiving benefits under the supplemental pension plan by specified installments. These are payable over a 10-year period. How does the former spouse receive the former spouse’s share in this situation? |
| S 117 applies. See para 6.4. Payments to the former spouse would continue until the earliest of the death of the member, the death of the former spouse and the termination of benefits under the plan. In this case, the benefits would terminate when the 10 years of installment payments are completed. With respect to the possibility that the member may die before the installments are fully paid, see paras 5.5 and 5.6. | |
| 6.6 Forfeiture | The member was receiving a supplemental pension, and the former spouse was receiving a proportionate share of the monthly payments being made, under FLA, s 119. But the payments were forfeited when the member took employment with a competitor of the plan sponsor. How does this affect the former spouse’s entitlement? |
| Payment of the former spouse’s proportionate share of the income stream ceases. The former spouse’s entitlement is subject to the same terms and conditions that apply to the member’s benefits. If the member’s benefits are adjusted, suspended or brought to an end under the terms of the supplemental pension plan, this also applies to the former spouse’s entitlement. If a forfeiture clause applies to the member’s supplemental benefits, it applies equally to the former spouse’s proportionate share of those benefits. [FLA, s 119(4)] The former spouse, however, may have a remedy against the member. [FLA, s 120] | |
| 6.7 Forfeiture of separate pension | When the member’s supplemental pension commenced, the limited member received a separate pension. The member has taken steps that forfeit the supplemental benefits. How does this affect the limited member’s separate pension? |
| The separate pension is also forfeited. The same rules apply as were discussed in para 6.6. | |
| 6.8 Admin. fee | What is the administrative fee for dividing benefits in a supplemental pension plan? |
| The maximum fee that can be charged for registering a former spouse as a limited member of a supplemental pension plan is $1000. If the former spouse is becoming a limited member of the registered pension plan, and of the supplemental pension plan to the registered pension plan, the administrator could charge a maximum of $2000. Usually in these cases, however, the administrator would charge only $1000 for the registration of the limited member under both the registered pension plan and the supplemental pension plan [SN6] | |
| 6.9 Proportionate share of SPP | How is the limited member’s proportionate share of the supplemental benefits determined? |
| If the agreement or court order providing for the division does not address how the former spouse’s proportionate share is determined, it would be determined in accordance with the Division of Pensions Regulation. If the supplemental benefits have matured into a pension, or if they are unmatured and in a plan that uses a benefit formula provision, the former spouse is entitled to a pro rata share calculated using pensionable service. [Reg., s 17] See para 2.18. This will produce the same result as the limited member’s share |
| of the registered pension, unless benefits under the supplemental pension plan are determined by a formula that differs from the registered plan. See para 6.11. If the benefits are in a plan that uses a defined contribution provision, the former spouse would receive a share of the account balance. [Reg., s 20] See para 3.4. | |
| 6.10 Providing separate pension for SPP before member’s pension commences | Under our supplemental pension plan, benefits are calculated by first determining the whole of the member’s entitlement as if there were no ITA ceiling, then determining the part that can be paid under the registered pension and, finally, providing the balance through the supplemental pension. If the limited member takes a share of the registered benefits before the member’s pension commences, it would be easiest for us to determine the limited member’s share of the supplemental benefits at the same time. Can we do that? |
| Yes, that option can be made available to the limited member. [FLA, s 119(3)] [SN7] [SN8] Adopting that approach would avoid the problem discussed in para 6.12. | |
| 6.11 Formula for SPP is different from formula for RPP | Under our plan, different benefit formula provisions are used for determining entitlement to the registered pension and the supplemental benefits and, in this case, the member has been granted pensionable service under the supplemental pension plan in addition to time actually worked. How is this dealt with? |
| If the parties’ agreement or order does not address this directly, the proportionate share of each would be determined separately under Reg., s 17. Additional service granted under the supplemental pension plan would be determined by when it was “accumulated”. If the grant was made during the relationship, then it would be included in both the numerator and denominator of the proportionate share formula. | |
| 6.12 Benefits migrate from SPP to RPP | Isn’t there a problem calculating entitlement to the registered benefits and the supplemental benefits at different dates? The CRA ceiling changes over time, and this means that benefits that at one time would have been paid under the supplemental pension plan could, at a later date, be considered paid under the registered pension. How is this dealt with? |
| Yes, in some cases, this migration of benefits occurs between the registered and supplemental pension plans as a result[SN9] of plan design. The default rules do not directly address this issue, beyond the general principle that the limited member |
| is entitled to a proportionate share of all of the benefits under each of the plans. See para 6.10 for one solution. Otherwise, the directions of the parties on this issue should be requested. | |
| 6.13 Death of member and limited member’s share of SPP | The former spouse is a limited member of our supplemental pension plan. The member has died before pension commencement. How does this affect the limited member’s entitlement? |
| See para 8.15. | |
| 6.14 Average age of retirement and SPP | Our supplemental plan does not have a filed valuation report, nor any defined average age of retirement. This is probably the case for most supplemental pension plans. How do we determine the average age of retirement? |
| The ability of the administrator, under Reg., s 23(5)[SN10] , to select an age, was designed to deal with this issue. In most cases, it would be appropriate to use the same average age of retirement that applies to the benefits under the registered pension plan. See para 2.59. | |
| 6.15 Order or agreement silent about SPP | The court order we received refers to dividing benefits under the plan we administer. The member is also entitled to benefits under a supplementary plan, but the order does not refer to those benefits. Are they subject to division as well? |
| The usual rule is that, if an agreement or order representing a final settlement is silent about benefits, the benefits are deemed to be allocated 100% to the member. [FLA, s 111(2); see paras 1.6, 6.15 and 11.17 for the general rule, and para 13.24 for legal options available to a former spouse if the agreement is silent about the pension entitlement] However, another principle also applies in these cases. If the supplemental benefits are not expressly referred to, but they are integrated with a registered pension that is to be divided under the agreement or court order, then that would usually be sufficient to require the supplemental benefits to be included in the division (unless the order or agreement clearly provided that they were excluded): Thoburn v Thoburn, 1993 CanLII 1311, 46 RFL (3d) 265 (BCSC). |
| Best practice is for the parties to address this issue in the pension division arrangements. The first step would be to confirm expressly with the plan administrator whether the member is entitled to supplemental benefits, when the Form P1 is sent in. | |
| 6.16 Dividing an IPP | We administer an Individual Pension Plan. The member’s former spouse is claiming a share of the benefits in the plan. How would this be divided? |
| Benefits in an IPP are divisible under Part 6. [FLA, s 121] But the rules that apply are different from those that apply to benefits in other registered local plans (see Chapter 2). Under the FLA, the former spouse becomes a limited member of the plan and is permitted to receive the share of the benefits as a separate pension payable for the former spouse’s lifetime, when the member’s pension commences. The separate pension would be determined in the same way as a limited member’s separate pension under a registered plan (see Chapter 2). | |
| 6.17 Why are options for dividing IPP restricted? | Why isn’t the former spouse entitled to choose to receive a separate pension at any time after the earliest date that the member could do that? If that option is fair for benefits in other registered pension plans, why is it not appropriate for an Individual Pension Plan? |
| The fact that other options are not automatically available is in recognition that these types of plans are set up for 1 to 3 members. Dividing benefits before pension commencement for a plan with few members may cause problems for plan funding and may prejudice other members. For this reason, the former spouse’s entitlement is to receive a separate pension when the member chooses to have the pension commence. Any of the other options for dividing benefits that are available with respect to registered pension plans, however, are available with the consent of the administrator. [FLA, s 121(3)] |
| 6.18 Death of member & IPP | The former spouse is a limited member of the individual pension plan for the member. The member has died before pension commencement. How does this affect the limited member’s entitlement? |
| The death of the member ends the deferral of the pension division arrangements, and the former spouse would receive the share at that time. See para 8.3. | |
| 6.19 ITA definition of specified individual | The FLA refers to “specified individuals within the meaning of the Income Tax Act”. But the ITA has two different definitions of “specified individual”, one in s 120.1 of the ITA, which deals with residents who are under 17, and another in the ITA Regulation, s 8515(4), which deals with pension plans. Which one applies? |
| ITA Regulation, s 8515(4), which deals with pension plans, applies. This was a question that was raised when the FLA was first enacted. But there was no real question because ITA, s 120.1 has no relevance or application to dividing benefits under Part 6. Any residual confusion on this point, however, has been addressed by an ancillary amendment introduced by the new PBSA, which revised the FLA, s 110 definition of “specified individuals” so that it expressly refers to ITA Reg., s 8515(4). | |
| 6.20 Average age of retirement and IPP | Pension plans for connected members (generally IPPs) do not file actuarial valuations with the superintendent. How do we determine the average age of retirement? |
| The ability of the administrator, under Reg., s 23(5),[SN11] to select an age, was designed to deal with this issue. See paras 2.59 and 6.14. |
[SN1]Updated by Stephen Cheng (Westcoast Actuaries)
[SN2]Updated by Stephen Cheng (Westcoast Actuaries)
[SN3]Updated by Stephen Cheng (Westcoast Actuaries)
[SN4]Updated by Stephen Cheng (Westcoast Actuaries)
[SN5]Added by Stephen Cheng (Westcoast Actuaries)
[SN6]Updated by Stephen Cheng (Westcoast Actuaries)
[SN7]Darryl Hrenyk (MAG) -I think this should be (b) or (c ) since there is no (d)
[SN8]Adrian Rockwell (BC Pensions) – There is no paragraph (d) in FLA s. 119(3).
I think this scenario would fall under s. 119(3)(b).
[SN9]Updated by Stephen Cheng (Westcoast Actuaries)
[SN10]Updated by Darryl Hrenyk (MAG)
[SN11]Updated by Darryl Hrenyk (MAG)