What Is a Deferred Profit Sharing Plan (DPSP)? How It Works

What Is a Deferred Profit Sharing Plan (DPSP)?

A deferred profit sharing plan (DPSP) is a Canadian employer-sponsored profit sharing plan intended to help employees save for retirement. The money in an employee’s DPSP account grows on a tax-deferred basis until withdrawal.

Understanding Deferred Profit Sharing Plans

DPSPs are a type of pension plan registered with the Canadian Revenue Agencybasically the Canadian version of the Internal Revenue Service (IRS) in the United States.

On a periodic basis, the employer shares profits from the business with all employees—or a designated group of them—through the DPSP. Employees who receive a share of the profits paid out by the employer do not have to pay federal taxes on the money until they later withdraw it from the DPSP.

An employer that offers a DPSP is referred to as the sponsor of the plan. The funds are managed by a trustee.

The money in an employee’s DPSP account grows tax-deferred, which can lead to bigger investment gains over time, due to the compounding effect. Employees can withdraw part or all of their vested funds prior to retirement even if they are still working for that employer. They can also transfer the money to another registered plan and maintain its tax-deferred status. Taxes are due only upon withdrawal.

How Deferred Profit Sharing Plans Work

• Contributions may be made only by employers. Employees cannot contribute.
• Contributions are tax-deductible to the employer.
• Individuals do not pay taxes on employer contributions until they withdraw the money.
• Investment earnings are tax-deferred, as well.
• Registered Retirement Savings Plan (RRSP) contribution limits are reduced by DPSP contributions.
• DPSPs are often combined with pension plans or a Group RRSP to provide employees with retirement income later in life.
• Most plans allow individuals to decide how their DPSP money is invested, though some companies may require employees to purchase company stock with their contributions.
• When an individual leaves an employer, they can transfer their DPSP money to another registered plan or use it to purchase an annuity, while maintaining its tax-deferred status. They can also cash out, though that would trigger a tax event with a tax payment required in the year they receive the money.

Deferred Profit Sharing Plans: Advantages for Employers

For employers, a deferred profit sharing plan paired with a group retirement savings plan can be a cheaper alternative to offering a traditional pension plan. Some of the positive attributes of DPSPs from an employer perspective are:

• Tax incentives. Contributions are paid out of pre-tax business income and are therefore tax-deductible for the employer. They are also exempt from both provincial and federal payroll taxes.
• Cost. DPSPs can be less expensive to administer than other pension plans.
• Flexibility. Employers can base their contributions on their profits for the year and are not required to contribute if they didn’t make a profit.
• Employee retention. DPSPs give employers a valuable tool to incentivize their best workers to stick around, since the contributions are subject to a two-year vesting period.

The Bottom Line

Deferred profit sharing plans (DPSPs) are a type of employer-sponsored retirement savings plan offered by some employers in Canada. DPSPs can be funded only by employers and the money in them grows on a tax-deferred basis until the employee eventually withdraws it.