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RPP — Money Purchase provision

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A money purchase provision of a registered pension plan — also called a defined contribution provision — credits contributions to an account held for each member and pays out whatever that account has become. The employer's obligation is to contribute what the plan text requires, not to deliver a particular pension, so the investment risk sits with the member rather than the employer. That difference drives what you will see on the file: no actuarial valuation, but contributions tracked against an annual limit member by member, forfeitures that must be dealt with correctly, and a pension adjustment built from amounts credited rather than benefits promised. Callers routinely describe a money purchase provision in defined benefit language, so the first job is often working out which provision they actually have. This tutorial covers the annual cycle, the contribution limit, forfeitures, and what happens when a member retires or leaves.

How to work through this tutorial

This follows the money purchase provision through a plan year: 1. Understand what a money purchase provision is and where the risk sits. 2. Register the plan and keep the registration current. 3. Track contributions against the annual limit for each member. 4. Handle forfeitures — the part most likely to be got wrong. 5. Determine and report each member's pension adjustment. 6. Deal with the payout end: retirement, variable benefits, and the deadline for starting them. 7. Handle terminations, including the pension adjustment reversal that may follow. 8. Check your work against the common pitfalls. 9. Verify every specific against CRA's published guidance before relying on it. This tutorial explains method and obligation. It does not calculate contributions, limits or pension adjustments.

What a money purchase provision is

Under a money purchase provision, each member has an account. Employer contributions, any required member contributions, and investment earnings accumulate in it, and at retirement the account balance funds whatever benefit it can. Nothing is promised about the outcome. The plan text fixes what goes in — a percentage of earnings, a matching formula, a flat amount — and the member receives what that grows to. If investments do poorly, the member's pension is smaller; the employer has no obligation to make up the difference. That is the reverse of a defined benefit provision, where the benefit is fixed and the contributions are whatever the actuary determines is needed. Because there is no promise to fund, there is no actuarial valuation and no funding deficiency to report. This removes a substantial administrative burden, and it is why smaller employers frequently choose this design. What replaces that burden is per-member precision. The annual contribution limit applies member by member, forfeitures must be tracked and dealt with, and the pension adjustment depends on getting the total credited to each account exactly right. The work moves from the actuary to the record keeper. A money purchase provision can sit inside the same registered plan as a defined benefit provision. Where it does, each provision is administered under its own rules.

Registration and ongoing obligations

A money purchase provision is registered the same way a defined benefit provision is: an application to CRA's Registered Plans Directorate, supported by the plan text, reviewed against the registration conditions in the Income Tax Act and its Regulations. The same primary purpose test applies — the plan must exist mainly to provide lifetime retirement benefits to employees in respect of their service. A plan operated as a general savings vehicle, or one designed primarily to benefit owners, does not qualify however it is drafted. Amendments must be filed as they are made, on the same footing as any other registered plan. The same warning applies: a change is an amendment whether or not anyone labelled it one, and a plan whose filed text no longer matches the plan being administered has a problem waiting to be discovered. The plan files an annual information return with CRA covering membership, contributions and plan status. This is separate from the members' slips and has its own deadline. What a money purchase provision does not need is the periodic actuarial valuation and the funding filings that go with it. That is the main ongoing difference in the compliance calendar.

The annual contribution limit

Total contributions credited to a member under all money purchase provisions for a year are capped at the money purchase limit for that year. The cap applies to the member, not to the plan, so a member participating in more than one plan is subject to one combined ceiling. The money purchase limit is set annually and changes every year. This tutorial does not state its value. A carried-forward limit is the classic failure here: it produces over-contributions that look ordinary in the records and are usually discovered only when the pension adjustment is questioned or a review takes place. Take the current figure from CRA's published limits table. Contributions to a money purchase provision are made in respect of a calendar year, and the timing rules governing which year a contribution is credited to matter for the limit and for the pension adjustment. Confirm the rules for contributions made after year end in the guide before assuming they fall in the year they were paid. Investment earnings credited to the account are not contributions. They do not count against the annual limit and they are not part of the pension adjustment. The distinction to hold onto is between amounts allocated into the account and amounts the account earned — the first are limited and reportable, the second are not.

Forfeitures

When a member terminates before their entitlement to employer contributions has fully vested, the unvested portion is forfeited and remains in the plan. What happens next is where money purchase administration most often goes wrong. Forfeited amounts cannot simply sit in the plan indefinitely. They must be dealt with — typically reallocated to the accounts of remaining members, or applied to reduce the employer's future contributions — within a time limit that runs from the forfeiture. Confirm the deadline and the permitted uses in the guide; leaving forfeitures unapplied past the limit is a compliance failure, not a bookkeeping preference. Where forfeitures are reallocated to members, the reallocated amount forms part of that member's pension adjustment. This is the single most commonly missed component of a money purchase PA, and the reason is structural: a reallocated forfeiture increases the member's account without any new money arriving from the employer or the member, so it appears nowhere in payroll records or contribution remittance reports. It is visible only in the plan's own accounting. An administrator who builds pension adjustments from payroll data will therefore understate them for every member who received a reallocation, consistently, year after year, with nothing in the payroll records to reveal it. Build the PA from the plan's account records instead. Where forfeitures are used to reduce employer contributions rather than reallocated, they do not become part of any member's pension adjustment — but the reduced employer contribution is what gets reported.

The pension adjustment

Under a money purchase provision, the pension adjustment for a member is the total credited to them for the year: employer contributions, any required member contributions, and reallocated forfeitures. Because the contributions are the measure, no benefit entitlement calculation and no actuarial input is needed — the PA falls out of the account records. The PA is reported on the member's information slip for the calendar year, in the designated pension adjustment box, and forms part of the annual information return. Members with a pension adjustment but no employment income to report are reported on the alternate slip; nobody with a PA goes unreported. As with any pension adjustment, the reported amount reduces the member's RRSP deduction limit for the following year, not the year the PA relates to. The pension adjustment tutorial covers the cap that applies, the reporting boxes and deadlines, and how the reduction flows through to the member. A nil pension adjustment is still reported. A member who was in the plan but had nothing credited for the year gets a slip showing nil, not no slip.

Payout, retirement and terminations

A member's account must begin paying out by a deadline tied to their age; a registered pension cannot be deferred indefinitely. Confirm the applicable age and the latest permitted commencement date in the guide and track it per member, because this deadline arrives on a date nobody is monitoring. The traditional route is to convert the account to a life annuity or transfer it to a locked-in retirement vehicle. Many plans also permit variable benefit payments made directly from the plan, where the member draws down the account while it stays invested in the plan. If your plan offers variable benefits, confirm the conditions and the minimum payment requirements, as these are a distinct set of rules from the accumulation phase. When a member terminates before retirement, the vested portion of their account is theirs and the unvested portion is forfeited as described above. A pension adjustment reversal can arise on termination where the amount the member actually receives is less than the pension adjustments reported for them. PARs have their own form and a deadline that runs from the calendar quarter in which the termination occurred rather than from year end, which makes it the most commonly missed deadline in registered plan administration. The PAR tutorial covers it.

Common pitfalls

Building pension adjustments from payroll data. Reallocated forfeitures never appear there, so every affected member's PA is understated and nothing in the payroll records shows it. Leaving forfeitures unapplied. They must be reallocated or used to reduce contributions within a time limit; parking them in the plan is a compliance failure. Carrying forward last year's money purchase limit. It changes annually and a stale value produces over-contributions that look unremarkable in the records. Treating investment earnings as contributions. Only allocations in count toward the limit and the PA. Applying the limit per plan instead of per member. A member in more than one plan has one combined ceiling. Assuming a contribution falls in the year it was paid. The rules on which year a contribution is credited to matter for both the limit and the PA. Missing the benefit commencement deadline for older members. Missing the PAR filing window on a termination. It runs from the quarter of termination, not from year end, and it is short. Not filing plan amendments, or not recognising a change as an amendment. Reporting nothing where the PA is nil. A nil PA is reported as nil.

What to verify this tutorial against

This was drafted without a source document. Every specific needs confirming against CRA's published guidance before you rely on it. CRA's guide to registered pension plans covers registration, the registration conditions, amendments and the administrator's ongoing obligations, including the rules on forfeitures and on contribution timing that this tutorial only summarises. The pension adjustment guide covers how a money purchase PA is determined and reported, including the treatment of reallocated forfeitures and the annual cap. The pension adjustment reversal guide covers PARs on termination. The Registered Plans Directorate's newsletters carry its administrative positions and are the practical source for questions the guides do not settle — variable benefit administration in particular. The money purchase limit is published annually in CRA's limits table alongside the defined benefit limit, the RRSP dollar limit, the DPSP limit and the year's maximum pensionable earnings. All of them change every year. Use the table for the year you are administering. Where your plan's own terms govern — the contribution formula, the vesting schedule, how forfeitures are applied, whether variable benefits are offered — the plan text is authoritative.

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