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LTD insurance requirements coming soon for Ontario employers

As part of the 2014 Ontario budget, which was passed on July 24, 2014, the Ontario government proposed to amend the Insurance Act (Ontario) by requiring mandatory insurance of long-term disability (“LTD”) benefits provided by employers. The amendment prohibits the provision of LTD benefits by Ontario employers unless the benefits are provided through an insurance arrangement with a licensed insurer.

The purpose of the amendment is to protect recipients of LTD benefits from reductions in their benefits when their employer faces financial challenges. This change will be effective on a future date to be proclaimed. Terms and conditions, including limitations, restrictions and exemptions, may be set out in regulations to come.

The requirement to insure LTD benefits is not new. The federal government introduced a similar requirement for federally-regulated employers in 2012, which came into effect on July 1, 2014. The federal requirement is prospective meaning that LTD benefits that were in pay to employees on that date do not have to be insured.

Ontario employers with self-insured LTD benefit plans should consider insuring their plans in the near future, in anticipation of the change.

By: Heather Di Dio and Aiwen Xu

LTD insurance requirements coming soon for Ontario employers

Get ready for the new Ontario Retirement Pension Plan

Now that the 2014-2015 Ontario budget has been passed by the Ontario legislature, Ontario employers should think about how the new Ontario Retirement Pension Plan (ORPP) could affect them.

The ORPP is part of the Ontario government’s solution to help individuals save for retirement. It’s a new “made-in-Ontario” solution to the federal government’s inaction on expanding the CPP. The ORPP will be a defined benefit pension plan, similar to the CPP, that will be publicly administered at arm’s length from the Ontario government.

Mandatory participation in the ORPP is set to begin in 2017, with enrolment occurring in stages starting with the largest employers. Contributions will be split equally between employers and employees, up to 1.9% each (3.8% total) on an employee’s earnings above a yet-to-be-determined minimum threshold and up to a maximum annual earnings threshold of $90,000. The ORPP aims to provide individuals with retirement benefits that replace 15% of the individual’s pre-retirement earnings (up to $90,000).

The question that employers should be asking is simple: Will I have to participate in the ORPP? The answer, however, is not so simple.

The Ontario government has stated that employers with a “comparable workplace pension plan” will be exempt from participating in the ORPP. But what does “comparable” mean? Does it mean a registered defined benefit pension plan? Probably. What about a registered defined contribution pension plan (DCPP)? Maybe. How about a group Registered Retirement Savings Plan (group RRSP) or a Pooled Registered Pension Plan or even a Tax-Free Savings Account? I don’t know.

To date, the government has not offered any details on what would constitute a “comparable” plan.
If the intent is to require employers to help contribute to their employees’ retirement savings, offering a group RRSP where employer contributions are optional may not suffice. It also might not be enough for an employer to provide a DCPP to its employees since the minimum employer contribution in a DCPP is 1% of an employee’s earnings, almost half of the maximum 1.9% required under the ORPP.

Employers need to start thinking about how the ORPP could affect their business. Employers who aren’t exempt will certainly have increased payroll costs. In addition to that fact, an employer offering a comparable pension plan to its employees may want to consider whether to integrate its current plans with the ORPP, to offload some responsibility, costs and future risk. An employer wishing to wind up a registered pension plan and replace it with a group RRSP in order to save costs may want to wait and see if a group RRSP counts as a comparable pension plan before making changes. Until more details about the ORPP are released, any Ontario employer who doesn’t have a defined benefit pension plan should be monitoring this since we can’t be sure how the ORPP will affect them.

If you’d like more information on the ORPP and its impact on your business, contact one of the pension and benefit experts at Dentons.

For more information on the ORPP from the Ontario government, click here.

Get ready for the new Ontario Retirement Pension Plan

Welcome guidance on pension plan fees & expenses

The subject of what can and can’t be charged to a pension plan has always been an important one for employers because of the often high costs related to administering a pension plan.

On January 23, 2013, the Ontario pension regulator (the Financial Services Commission of Ontario), issued a new policy regarding administrative fees and expenses payable from a pension fund. The new policy, Policy A200-101, replaces four existing policies on the topic and is accessible at http://www.fsco.gov.on.ca/en/pensions/policies/active/Documents/A200-101.pdf.

Although clarification regarding expenses chargeable to pension funds was provided in late 2010 with the addition of a new section 22.1 in the Ontario Pension Benefits Act (“PBA”), Policy A200-101 provides additional guidance that is welcome.

Policy A200-101 reiterates that fees and expenses payable from a pension fund must:

  1. be reasonable;
  2. relate to the administration of the pension plan or the administration and investment of the pension fund; and
  3. not be prohibited or otherwise provided for under the documents that create and support the plan or the fund, or under the PBA or related regulations.

It is the plan administrator’s responsibility to determine whether or not an expense fits the criteria to be properly charged to a pension fund. So it is up to the plan administrator to decide whether amounts are appropriate and reasonable, and to find out whether there are provisions in the pension plan documentation that restrict the charging of expenses.

Since each pension plan is unique, the PBA and regulations do not set out the specific nature or type of administrative expenses that can be paid from a pension fund. However, Policy A200-101 provides examples of the types of expenses that would usually be considered appropriate administrative expenses, such as certain actuarial fees, trustee and custodial fees, and investment management fees. It also provides examples of expenses incurred that would not usually be properly chargeable to a pension fund. These typically include fees incurred by a person acting in the role of plan sponsor, collective bargaining agent or employer.

Many types of fees and expenses incurred by a plan sponsor or administrator can be complex and difficult to categorize. FMC can help you identify proper fees and expenses that can be charged to your pension fund. Please feel free to contact one of our Pension & Benefit experts and we would be pleased to assist.


Welcome guidance on pension plan fees & expenses

New Q&A on the Payment of Small Benefits from Pension Plans

The Ontario pension regulator recently posted new questions and answers on its website regarding the “small benefit” payout rules for Ontario-registered pension plans (accessible at: http://www.fsco.gov.on.ca/en/pensions/legislative/Pages/Smallamount.aspx).

The following is a description of the new Ontario rules about cashing out small pension benefits, which we wrote about in our blog dated July 9, 2012.  You can view that blog entry at http://www.employmentandlabour.com/cashing-out-of-small-pension-benefits-the-rules-have-changed.

Effective July 1, 2012, section 50(1) of the Ontario Pension Benefits Act was changed to increase the maximum amount that can be unlocked (i.e. paid in cash) from a pension plan as a “small benefit”.  The change allows a pension plan administrator to provide individuals with their pension benefit as a lump sum cash payment if the amount of the benefit is considered small.  This is good for plan administrators because it can assist in situations where a monthly pension benefit would be administratively burdensome to administer (e.g. an individual is entitled to only receive a few dollars each month).  Also, it could assist in situations where an annuity cannot be purchased for a former member because the amount of his or her benefit is too small.

Prior to the change and subject to the plan terms, a individual who terminated his or her membership in a pension plan was able to unlock his or her benefit if the annual benefit payable at normal retirement was not more than 2% of the YMPE in the year that he or she terminated employment.  The amended section now allows a former member of a pension plan to receive a lump sum equivalent of his or her benefit, provided the plan terms permit it, if:

a)      the annual benefit payable at normal retirement is not more than 4% of the YMPE in the year that he or she terminated employment; or

b)      the commuted value of the benefit is less than 20% of the YMPE in the year that he or she terminated employment.

For example, since the YMPE for 2012 is $50,100, if an individual terminates employment in 2012, he or she may be entitled to a cash payment of his or her pension benefit if the total annual benefit to be provided under the pension plan is not more than $2,004 per year, or the total value of the pension benefit is less than $10,200.

The questions and answers on FSCO’s website provide clarity to a number of issues and confirm the following:

  • A pension plan administrator can only apply the new higher “small benefit” thresholds if the plan text provides for it.  If the plan text still refers to the old thresholds, the old thresholds must be applied unless the plan text is amended.  Note that a plan text does not need to provide for the unlocking of “small benefits” at all; it is up to the plan sponsor to decide whether to provide this additional benefit to plan members.
  • It is fine for a pension plan text to use generic wording to allow the payment of small amounts, instead of referring to the exact percentages that are set out in the legislation.
  • The new “small benefit” thresholds can apply to former members who terminated their employment prior to July 1, 2012.  However, the plan administrator must use the YMPE for the year in which the former member terminated employment.
  • Only the YMPE in the year the member terminated employment is relevant for the purposes of determine whether a benefit is small.

As many changes to the Ontario Pension Benefits Act came into effect this summer, we will let you know if additional guidance is released by the Ontario pension regulator regarding these changes.


New Q&A on the Payment of Small Benefits from Pension Plans

Interest on Employee Pension Contributions and Lump Sum Payouts: New Rules

We recommend that pension plan sponsors check what their plan texts say about the crediting of interest on contributions made by employees to the plan and lump sums payable to terminated members.

New rules were recently introduced to clarify the interest that should be applied to those amounts. For defined benefit pension plans that are not insured, if the plan text is silent on this issue, the interest rate must be at least the prescribed bank deposit rate. A plan sponsor may be able to credit employee contributions with interest equal to the pension fund rate of return; however, this must be expressly provided for in the plan text for DB plans.

For defined contribution pension plans that are not insured, the new rules require that the interest rate be at least equal to the pension fund rate of return. These new rules were effective July 1, 2012.


Interest on Employee Pension Contributions and Lump Sum Payouts: New Rules

Pension Plan Mergers and Asset Transfers: The Rules are Changing

Two years ago Ontario pension legislation was changed to provide for new rules that will make asset transfers and the merger of two or more pension plans much simpler. These are welcome changes since it has been expensive, and sometimes legally impossible, to merge pension plans under the current rules.

Unfortunately, employers cannot proceed under the new rules yet. Specific regulations are required to implement them. The Ontario government announced in its 2012 budget that these regulations would be released this spring, but we haven’t seen anything yet. Plan sponsors wishing to take advantage of the simpler asset transfer and plan merger rules will have to wait a bit longer.


Pension Plan Mergers and Asset Transfers: The Rules are Changing

Pension Surplus Rules Have Changed

In December of 2010, changes were made to Ontario pension laws to make it easier for employers to withdraw surplus. Employers no longer have to conduct tedious and expensive historical plan reviews in order to implement a surplus-sharing deal. Rules were also introduced to create a new arbitration process in cases of disputes with pension plan members. Employers are now allowed to receive surplus if:

  • the employer is entitled to the surplus according to the pension plan documents;
  • there is a written surplus sharing agreement with pension plan members (and possibly other persons); or
  • a court order or arbitration award provides for the payment.

Additional changes to the surplus withdrawal rules were recently released and came into force on July 1, 2012. The recent pension reforms further simplify the surplus withdrawal rules by removing the requirements that employers provide information relating to surplus attribution and contractual authority in the written surplus notice to the plan members. In addition, the recent changes make it clear that if an employer is funding a wind-up deficiency and has contributed to the plan more than the amount required to fund the deficiency, the remaining assets in the plan may be refunded to the employer as an overpayment, rather than be treated as surplus.


Pension Surplus Rules Have Changed

Private Pension Plans: What The Budgets Have In Store For You

Last week, the Ontario and federal governments released their budgets for 2012. While the Ontario budget, Strong Action for Ontario (Ontario Budget), included numerous reforms that will impact private sector pension plans, the same could not be said for the federal Jobs Growth and Long-Term Prosperity: Economic Action Plan 2012 (Federal Budget). Employers in Ontario offering private pension plans should examine the need to change their current pension arrangements, while federally-regulated employers offering similar types of arrangements can rest easy (at least for another year).

Confirming Ontario Reforms

The Ontario Budget proposes to implement various reforms to the Pension Benefits Act (Ontario) (PBA) that were initially introduced in 2010, but are not yet in force. Click here for information on Bill 236 and Bill 120 reforms, announced in 2010. None of the proposed changes are new or surprising, but it is worthwhile to review them since it has been two years since they were first announced.

As of July 1, 2012, the Ontario government intends to make effective the following changes to the PBA:

  • immediate vesting of pension benefits;
  • elimination of future partial wind ups;
  • grow-in benefits available to all plan members whose employment is terminated (except if a member’s employment is terminated as a result of wilful misconduct, disobedience or wilful neglect of duty); and
  • the ability for multi-employer and jointly sponsored pension plans to opt out of grow-in benefits.

In addition, the Ontario government announced its intention to introduce long-awaited regulations to the PBA this year, some as early as this spring, which will:

  • clarify surplus rules;
  • implement many of the provisions for plan-to-plan asset transfers;
  • implement provisions that specify the rights and responsibilities of “retired members”;
  • set out a “funding concerns” test for defined benefit plans not required to fund on a solvency basis;
  • deal with eligibility conditions for sponsors taking “contribution holidays” and accelerated funding of benefit improvements; and
  • permit employers to use irrevocable letters of credit to fund up to 15% of solvency liabilities of defined benefit pension plans in certain circumstances.

Federal Budget Proposals

The Federal Budget includes very little on changes to the federal Pension Benefits Standards Act, 1985 (PBSA), other than a statement that the federal government will introduce technical amendments to strengthen the PBSA.

What the Federal Budget does focus on in terms of federally-regulated pension plans is pooled registered pension plans (PRPPs) and its intention to move forward with implementation. However, in order for PRPPs to be available for all Canadians, provinces must introduce their own legislation. Ontario has already expressed concerns over the PRPP model as currently proposed by the federal government.

What Does This Mean For You?

If you are an Ontario employer that provides a pension plan to your employees, you should review your plan terms to determine whether amendments are needed to immediately vest plan members, delete partial wind up provisions and provide for grow-in benefits.

If you are a federally-regulated employer that has a pension plan, stay tuned for future amendments to the PBSA that may affect your plan. You may also wish to re-evaluate your current retirement arrangements as the implementation of PRPPs may soon be on the horizon.

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Private Pension Plans: What The Budgets Have In Store For You