Deferred Profit Sharing Plan - USA
Deferred Profit Sharing Plan - USA
What is DPSP?
The Deferred Profit Sharing Plan (DPSP) is a business-driven profit-sharing plan sponsored by employers and this is registered with the Canada Revenue Agency (CRA). It is a way of sharing profits with employees.
Moreover, the following are some important key features that must be known and taken care of:
- It is a fund that is contributed to the plan by the employers - that is employer-sponsored
- The employers may include all the employees or they may extend support to a certain number of employees, for such a giveaway
- Albeit, some specific shareholders, as well as individuals who are related to the employers, are not allowed to participate in DPSP
- The Canada Revenue Agency (CRA) does not register an employer against DPSP unless the employer meets certain set criteria as per the Income Tax Act
- Employers may claim the contributed tax deduction against the DPSP provision of participation
- A trustee must be there as a bridge between the employer and the employees for benefit transfer in favor of the employees
- There are some defined contribution limits set out in the Income Tax Act for DPSP, which must be referred to from time to time
- DPSP is a way the employers to save the future of their employees in the form of financial contributions which are solely invested by the employers, and withdrawn by the employees without taking a bit of the employee’s financial part into it
Advantages and Disadvantages of DPSP
Advantages for the employer:
- Employers have got right to contribute whenever they want only
- That is an organization or employer if having no such contribution to any specified year, can do so, in other words, if faced with a shortfall of overall profits, the employers may not share in DPSP for that particular year
- Employers are at ease to tailor their own contribution plan
- Employers may make such contributions on a monthly or any basis they want, either regular or irregular – say sporadic basis
- The employers may include these benefits in a pay period or extend this support on an annual bonus basis
- Two years is the term as the maximum vesting period for DPSP, which enhances employee retention, hence if an employee leaves before the vesting period, the employee has the DPSP contributions nothing but simply gets forfeited
- The formulas are up to the employers to decide upon: either equal share payment to all the employees or the share as per the percentage of the earnings of an employee up to a specified limit
- As the DPSP is a tax-deductible plan for employers, it is preferable to a regular profit-sharing plan
Disadvantages for the employer:
- As the DPSP is an only-employee profit-sharing plan, hence employer’s spouse, relatives, and anyone having at least a 10 percent share in the company are all prohibited from getting contribution benefits
- Hence the top leadership and executives are not permitted to profit from DPSP, even when the company profits are at any stage - say lower or higher
- If an employer is having a bad year, and therefore the contributions to DPSP cannot be made, it may affect employees’ morale and increase turnover
Advantages for the employee
- The foremost advantage of the DPSP is this is an entirely employer-funded contributions plan and the employees do not have to invest anything into a DPSP as far as financials are concerned, hence it is a free monitory benefit
- Employees have to only stay a maximum period of two years – relatively a shorter vesting period, as per the limit of the DPSP maximum vesting, then after they may leave and switch job
- As two years is the maximum vesting period, the company an employee is working for may have a shorter vesting period, hence staying shorter with a company is an option for the employee
- Once an employee is vested, the employee has immediate access to DPSP contributions
- But it is advised to keep DPSP funds up to retiring age as it is expected to be in a lower pay taxes bracket at the time of retirement
Disadvantages for the employee
- The employers, in some cases, may force their employees to buy company stock against Deferred Profit Sharing Plan benefits
- Employees do not possess full access to the DPSP Vesting
- Therefore employees are advised to diversify their fund benefits received from DPSP into other retirement accounts
- If employees have bought company stocks and the price of the stocks drops dramatically, after it devalues employees’ contributions they received against DPSP
- If the employers are not making enough profitability and hence could not make contributions towards DPSP, in such a case the employees who are solely relying on DPSP benefits would be at sensitive enough stake and that is worrying
- If the main source of investment income for the employees before retirement is DPSP, then the employees are at considerable risk in a scenario where a company is unable to invest in DPSP due to deficit finance
- As a Deferred Profit Sharing Plan DPSP is solely for the employees, hence it is not distributed to spouses, like in RRSP
Can an employee withdraw money from a Deferred Profit Sharing Plan?
The amount can be withdrawn subject to the agreement between the employer and the employee, but the amount is taxable as income in the year it is drawn. In routine practice, the amount vested solely by the employer in a DSPS contribution is vested for a certain period of up to two years, and if an employee leaves before, the number of contributions is forfeited simply.
However, the amount of DSPS is transferable into other retirement planning contribution accounts like Registered Retirement Saving Plan (RRSP) or Registered Retirement Income Fund (RRIF).
Difference between RRSP and DPSP
Deferred Profit Sharing Plan (DPSP) and Registered Retirement Saving Plan (RRSP), if an employee has both plans, it is as simple as, if a company invests a 100 USD in the DPSP contribution account of an employee, the employee is now restricted to invest a 100 USD lesser in the RRSP contribution accounts.