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Chapter 13 - 8505 – Additional Benefits on Downsizing

 

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13.1 8505(1) – Downsizing Program

The Regulations allow special benefits to be provided to a member of an RPP who is terminating employment under an early retirement program that has been approved by the Minister.

Downsizing means a purposeful reduction of the employer's workforce.

13.2 8505(2) – Applicability of Downsizing Rules

13.2.1 8505(2)(a) – Acceptable Downsizing Program

A special early retirement program only needs approval as a downsizing program if the enhanced benefits described in subsection 8505(3) or subsection 8505(4) of the Regulations are to be provided, or if benefits are increased with foregone compensation as permitted by subsection 8505(8).

A special early retirement program has to demonstrate that it meets the following eligibility criteria, as outlined in our Newsletter No. 92-9, Downsizing Programs, before it can be approved as a downsizing program under section 8505 of the Regulations.

(1) Specific event

The program must be associated with a downsizing of the employer's entire workforce, including part-time employees, in one or more localities in Canada.

Locality generally means a region that may be comprised of a metropolitan area, a municipality that is not part of a metropolitan area, a remote work site or an area that may be as large as a province or the country. If an employer has two or more distinct operations at different locations within a metropolitan area, the Minister may accept as a "locality" a subdivision of the metropolitan area. The localities need not be contiguous. However when two distinct regions are considered for purposes of the net reduction test, all employees within the greater region must be considered for purposes of the net reduction test. The definition of locality may include distinct operations of an organization such as plants, factories, and divisions that can operate independently of the rest of the organization.

Example

One region is the Calgary area and the other regions are remote work locations within the province of Alberta. Considering these locations together they meet the net reduction test. It would be acceptable provided there are no other work locations within Alberta that are being excluded for purposes of the net reduction test.

(2) Net reduction test

It must be reasonable to expect that within 2 years of the introduction of the program or such longer time frame as is approved by the Minister, the downsizing will result in a net reduction of the employer's workforce in the locality of at least the greater of:

(a) 50 employees, and

(b) 10% of the employees in the locality.

Net reduction means the number of employees terminated less the number of employees hired.

If the program is voluntary, the number of employees who choose to participate may not be sufficient to meet the net reduction test. In this case, the employer must provide information stating how this test will be met.

(3) Broadly applicable

The downsizing must be broadly applicable to employees in qualifying localities. This means that within the group of terminable employees in qualifying localities, there must not be an undue concentration of higher-paid employees.

A terminable employee is an employee who could (but would not necessarily) terminate employment as a consequence of the downsizing. This includes employees who are required to terminate employment under a mandatory program and employees who are given the option to terminate employment under a voluntary program.

A downsizing is considered to be broadly applicable to employees in qualifying localities if no more than 35% of the terminable employees in those localities are in the top earnings quartile for those localities. Top earnings quartile means the 25% of all employees in the locality who have the highest remuneration. If the downsizing is targeted to a specific age group, the CRA may agree to modify this test so that it applies only with respect to the top earnings quartile for that age group. We may also consider a downsizing to be broadly applicable where the downsizing fails to satisfy the 35% test but not significantly so (40% max.).

(4) Non-discriminatory benefits

In terms of additional benefits promised under the program to terminable employees, there must be no discrimination within a given age/service profile in favour of either higher-paid employees or employees participating in an RPP. The benefits taken into account for purposes of this requirement include additional RPP benefits, provided either within the normal RPP rules or as enhanced benefits available under section 8505 of the Regulations, and cash termination payments.

(a) RPP members

Additional benefits promised to terminable employees in a given age/service profile and participating in an RPP will be considered to be non-discriminatory if:

  1. for each such employee, the benefits are determined in a substantially similar manner, or
  2. it is reasonable to expect that, within that profile, the greatest value of additional benefits promised to higher-paid employees will not be substantially greater than the smallest value of additional benefits promised to lower-paid employees.

For this purpose, the value of benefits to be provided to an employee means the estimated cost of any additional pension benefits promised to the employee, plus any cash payments to be made to the employee, expressed as a percentage of the employee's remuneration.

Example 1

An RPP has a benefit rate of 1% and an unreduced pension is payable at age 60. Under a proposed early retirement program, terminating employees with at least 20 years of service (regardless of age at termination) will be entitled to an unreduced pension payable at age 55. As additional benefits are determined in a substantially similar manner for each employee in any given age/service profile, the benefits are considered to be non-discriminatory.

Example 2

An RPP has a benefit rate of 1%. Under a proposed early retirement program, terminating employees who are between 55 and 64 years of age will be given 2 years’ worth of additional benefits. As additional benefits are determined in a substantially similar manner for each employee in any given age/service profile, the benefits are considered to be non-discriminatory.

Example 3

An RPP has a benefit rate of 1% and an unreduced pension is payable at age 60. Under a proposed early retirement program, terminating employees who are less than 60 years of age with at least 20 years of service will be entitled to an unreduced pension payable at age 55 (regardless of age at termination) and terminating employees who are between 55 and 64 years of age at termination will be given 2 years’ worth of additional benefits. As additional benefits are determined in a substantially similar manner for each employee in any given age/service profile, the benefits are considered to be non-discriminatory.

Example 4

An employer has a $30 flat benefit plan for hourly employees and a 2% final average plan for salaried employees. Under a proposed early retirement program, hourly and salaried terminating employees who are between the ages of 55 and 63 will be given 4 years’ worth of additional benefits. As additional benefits are determined in a substantially similar manner for each employee (whether hourly or salaried) in any given age/service profile, the benefits are considered to be non-discriminatory.

Example 5

Rather than promising 4 years’ worth of additional benefits to salaried employees, the employer in Example 4 promises only 2 years. While benefits for each hourly employee are determined in a similar manner and for each salaried employee in a similar manner, benefits for salaried employees are not determined in a manner substantially similar to the manner in which benefits for hourly employees are determined. Therefore, the benefits cannot be considered non-discriminatory on this basis. However, the greatest value of additional benefits promised to higher-paid employees is 40% of remuneration whereas the smallest value of additional benefits promised to lower-paid employees is 36% of remuneration. On the basis that it is not substantially greater than 36%, these additional benefits may be considered to be non-discriminatory.

Example 6

An RPP has a benefit rate of 1.3%. Under a proposed early retirement program, the benefit rate will be increased to 2% from pre-1990 pensionable service for those employees who are at least 55 years of age at termination, have at least 15 years of pensionable service, and earn at least $60,000 a year. As this additional benefit is contingent on earnings, it cannot be considered to be non-discriminatory. However, as it can be provided under the normal RPP rules, the fact that it is discriminatory is irrelevant.

(b) Non-RPP members

Additional benefits promised to employees in a given age/service profile who do not participate in an RPP will be considered to be non-discriminatory if it is reasonable to expect that, within that profile the smallest value of additional benefits promised to non-RPP members will not be less than 50% of the greatest value of additional benefits promised to RPP members. As in (a) above, the value of benefits to be provided to an employee means the estimated cost of any additional pension benefits promised to the employee, plus any cash payments to be made to the employee, expressed as a percentage of the employee's remuneration.

Example

An employer has a 2% RPP. A pension may commence to be paid on an unreduced basis at age 60 and on a reduced basis (5% per year) as early as age 50. The plan is contributory and voluntary. Only 10% of the terminable employees have consented to participate and these are the highest-paid employees. Under a proposed early retirement program, the employer is offering an unreduced pension at age 55 to those terminable employees who are participating in the RPP and a cash payment of $30,000 to those terminable employees who are not participating in the RPP. Of the terminable employees who are participating in the RPP, the unreduced pension is of greatest value to the employee whose pension is increased most relative to his earnings. The employee who fits this description earns $70,000 a year, is 55 years of age and has 20 years of pensionable service. The unreduced pension is worth 100% of his remuneration.

Of the terminable employees who are not participating in the RPP, the $30,000 cash payment is of least value to the employee with the greatest remuneration. The employee who fits this description earns $40,000 a year. The cash payment, therefore, is worth 75% of his remuneration. As 75% is more than 50% of 100%, the additional benefits promised to employees who are not participating in the RPP are considered to be non-discriminatory.

(c) Different age/service profiles

It is not a requirement that, across different age/service profiles, benefits promised to terminable employees be non-discriminatory. However, age/service profiles must not be selected so as to ensure that the most generous benefits are promised only to the most highly paid employees.

The following example illustrates the application of this requirement. Under a proposed early retirement program, terminating employees who are 60 years of age with 15 years of service will be given 5 years worth of additional benefits while all other terminating employees will be given 1 year of deemed service. It is highly probable that only one employee will be entitled to the five years of deemed service. It is also highly probable that this employee is a senior executive. It is clear that age/service profiles under this program have been designed so that the most generous benefits are promised to the most highly paid employee. These benefits, therefore, are considered to be discriminatory and the downsizing program is not acceptable.

(5) Participation

Participation in the downsizing program may be voluntary or involuntary.

(6) Re-employment

The employer is to advise us when an individual to whom enhanced benefits have been provided re-establishes a working relationship (either as an employee or on a contract basis) with an employer who participates in the plan or a related employer.

(7) Administrative requirements

To review a downsizing program, the CRA requires:

Subsequent to our review, we will give approval in principle to the proposed downsizing program if the program meets the above-noted eligibility criteria.

Formal approval of the downsizing program will be given once we have received and approved the following:

Cross Reference:

Newsletter No. 92-9, Downsizing Programs

13.2.2 8505(2)(b) – Qualifying Individual

The description of a qualifying individual is for purposes of a downsizing program that has been approved in writing by the Minister. If the eligibility criteria is met, a qualifying individual can receive enhanced benefits that otherwise would not be permissible, and have rules waived that otherwise would apply. Subject to subsection 8505(2.1) of the Regulations, a plan member is a qualifying individual if:

 Cross References:

Acceptable Downsizing Program – 8505(2)(a)
Connected Persons – 8500(3)
Qualifying Individual – Exclusion – 8505(2.1)

13.2.3 8505(2)(c) –Specified Day (duration of program)

A specified day in respect of an approved downsizing program is the day designated by the Minister by which the retirement benefits must start to be paid under subparagraph 8505(3)(c)(ii) of the Regulations. If no day is designated, enhanced benefits and waiver of rules not otherwise available may be provided for up to two years from the date we approve the downsizing program. Any requests for an extended duration of the downsizing program must be approved by the Minister.

13.3 8505(2.1) – Qualifying Individual – Exclusion

This is an anti-avoidance rule that does not apply to plan members whose employment terminated before February 15, 1992, or who were notified of, or opted for, termination of employment before February 15, 1992, under an approved downsizing program.

The rule prohibits a plan from providing special downsizing benefits to a member if it is reasonable to expect that the member will subsequently become employed by, or render services to, the same employer or a related employer. The Minister may waive this rule where it is reasonable to expect that the member's re-employment will not last more than 12 months.

13.4 8505(3) – Additional Lifetime Retirement Benefits

Subject to the conditions outlined below, an RPP may provide additional LRBs that are not in respect of periods of eligible service as defined in paragraph 8503(3)(a) of the Regulations. For example, additional LRBs may be determined by reference to the value of benefits that would have accrued if additional years of service had been credited (it is important to note that in fact no service is actually credited to the employee, "service" remains a question of fact), or without reference to service whatsoever. The maximum number of additional years that can be included in the calculation is 7, or, if lower, the number of years and part years from the date of retirement to the member's 65th birthday. These benefits are referred to as special retirement benefits and may be provided with no PA or PSPA consequences. Any benefit increases offered to individuals under age 55 are subject to PA/PSPA limits.

Special retirement benefits may be provided to a plan member who is at least 55 years of age and terminates employment only if the following conditions are met:

13.5 8505(3.1) - Re-employed Members

If a plan member, who is receiving special retirement benefits under subsection 8505(3) of the Regulations, becomes re-employed by a participating employer and payment of the retirement benefits is suspended, then the condition in paragraph 8505(3)(d) is applicable in respect of benefits payable to the member after the suspension as if the period of re-employment and suspension of benefits had not occurred. This means that special retirement benefits will only be suspended not terminated, if the member becomes re-employed with a participating employer.

13.6 8505(4) – Early Retirement Reduction

The plan may provide benefits to a qualifying individual as though the individual were in a public safety occupation as defined in subsection 8500(1) of the Regulations. This means that the restrictions of subparagraph 8503(3)(c)(i) (rather than subparagraph (ii)) apply. As a result, an unreduced pension may be payable to a qualifying individual, regardless of the individual's age at termination of employment, from the earliest of:

The term early retirement eligibility service is defined in subparagraph 8503(3)(c)(iii) of the Regulations.

Furthermore, to the extent that LRBs commence to be paid to a qualifying individual prior to the earliest date determined above, the amount by which the individual's benefits must be reduced will be determined by reference to the number of months between the date that benefits commence to be paid and the earliest date determined above assuming the individual had continued in employment. This will result in a lesser reduction than if the individual were not considered to be in a public safety occupation.

The plan may promise benefits on this more favourable basis regardless of whether the terminating employee opts for an immediate or deferred pension or elects to take the commuted value of his entitlement to benefits under the plan. Note that the option to commute or defer the pension is available only to an employee who is not receiving additional LRBs but may be receiving a special unreduced early retirement pension. It is equally important to note that if the pension is commuted and transferred to another registered vehicle it is subject to the transfer rules and therefore the prescribed amounts are applied using the individual’s actual age at the time of the transfer.

It is not the intention of the downsizing policy to have individuals below age 55 withdraw from the workforce because they are forced to take an immediate pension.

13.7 8505(5) – Exception for Future Benefits

In calculating the pension of a member who is a qualifying individual under an approved downsizing program, subsection 8505(4) of the Regulations permits use of the smaller early retirement reduction that is otherwise only associated with a member in a public safety occupation. Should the member be rehired and accrue benefits for the period of re-employment (in which case payment of the benefits accrued prior to re-employment have to be suspended), the member is not required to forfeit the enhanced pension resulting from use of the smaller reduction. However, when calculating the member's pension the next time the member terminates employment, subsection 8505(5) limits the use of the smaller reduction to the period prior to re-employment. The regular early retirement reduction requirements of paragraph 8503(3)(c) apply to the period of re-employment.

Cross References:

Benefit Accruals After Pension Commencement – 8503(3)(b)
Re-employed Member – 8503(9) & (10)
Qualified Individuals – Exclusion – 8505(2.1)
Early Retirement Reduction – 8505(4)

13.8 8505(6) – Alternative CPI Indexing

Subsection 8505(6) of the Regulations allows for an alternative measure of inflation. The alternative measure must be based on the Consumer Price Index and be very similar to the amount in subsection 8505(3)(d).

13.9 8505(7) – Exclusion from Maximum Pension Rules

The plan may exclude special retirement benefits from the retirement benefits that are restricted pursuant to subsections 8504(1) and 8504(5) of the Regulations.

Even though special retirement benefits may be determined by reference to years of deemed service, such non-existent service is not considered to be pensionable service for purposes of the Regulations. Accordingly, there are no additional years of pensionable service taken into account for the following provisions:

13.10 8505(8) – Exemption from Past Service Contribution Rule

The provisions of subsection 8503(15) of the Regulations do not apply in the case of benefits provided to a qualifying individual. This includes regular benefits as well as enhanced benefits. Included in regular benefits are upgrades to the benefit rate or improvements to the plan that would have qualified under Information Circular 72-13R8. Subsection 8503(15) would normally render an RPP revocable where a member has given up compensation in return for employer-funded benefits in respect of pre-1990 service.

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