Cashing-out of Small Pension Benefits: The Rules have Changed

The rules for cashing-out or “unlocking” small pension benefit amounts have been overhauled. Effective July 1, 2012, it will be a lot easier to pay cash to a departing plan member who has a small benefit. In summary:

  • The threshold amount for cashing-out has been increased such that administrators can pay a terminating employee a lump sum amount in cash from the pension plan, if the amount of the employee’s annual pension is less than 4% (rather than the previous 2%) of the year’s maximum pension earnings (YMPE) amount. The 2012 YMPE is $50,100; it increases annually. For 2012 that annual pension amount is $1,002 under the old rules, and $2,004 under the new rules.
  • DC plan administrators will no longer have to convert a departing employee’s individual DC account into an annual pension amount in order to determine if the cash-out threshold is met. Under the new rules, the benefit can be cashed-out if the DC account is less than 20% of the YMPE (in 2012, that’s $10,020).

Many defined benefit and defined contribution pension plan texts set out the current small benefit payout threshold of 2% of the YMPE. There is no legal requirement to change plan texts to adopt the higher thresholds. However, we recommend that plan sponsors amend their plan texts so that they can adopt these higher cash-out thresholds. Doing so will significantly lessen the administration costs of dealing with employees who terminate plan membership with small pension benefit amounts.

Mary Picard

About Mary Picard

Mary Picard practices employee pensions and benefits law as a partner in the employment and labour law group in Dentons’ Toronto office. Mary has advised clients on the administration of Canadian pension plans and employee benefits for more than 30 years. She has been consulted by federal and provincial governments for policy advice on changes to pension law. She has assisted large and small employers, in both the private and public sectors, in their dealings with various players in the pension arena including pension regulators, unions, consulting firms, trustees, actuaries and auditors. Mary has extensive experience with difficult pension and employee benefit issues in insolvencies, restructurings, financings, and corporate transactions. She teaches pension courses at Humber College.

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