How to Match Employee Retirement Contributions

By QuickBooks Canada Team

2 min read

A great benefit to offer your employees is a group retirement plan that allows them to save for their future, while giving the company tax benefits. In Canada, most people are a part of a group registered retirement savings plan (GRRSP). This plan has its own set of advantages and disadvantages over other retirement plans, but allows the employer to match their employee’s contributions. Doing so helps attract and keep employees, as well as giving the business a tax deduction in the year it is given.

Helping Attract and Keep Employees

The first benefit to matching is that it attracts new employees to join the company as well as incentivizing existing employees to stay. From an employee’s perspective, this is free money towards their retirement if they can afford to contribute to the plan. It is important to create a matching percentage that is both attractive to the employees and cost effective from a business perspective.

For example, a 1% match of the employee’s contribution is considered low. More typically, businesses match 5% of an employee’s salary. In this scenario, if an employee contributes to the Group RRSP from their pay cheque, the maximum amount you have to match is 5% of their salary. If an employee makes $100,000 and contributes $10,000 (or 10%) into the GRRSP, you are only required to contribute $5,000. If that same employee only contributed $3,000 (or 3%) of their salary, the business only needs to match $3,000. Another added benefit of the matching program is that the business does not have to contribute to employees who do not participate. So if an employee contributed nothing to the plan, the business does not match anything.

You can also use the matching program to incentive employees to stay with the company based on a variety of factors, like length of service, sales performance, or senior status. Matching can be graded based on length of service, such as employees with over 1 year get 1%, 2 years get 2%, and 5 years get 5%. Matching can also be performance based on sales. For example, if an employee increased their sales goal by $100,000, their match goes up 1% for every increment. Matching is also a great way to reward senior status, by giving larger matches as bonus.

Tax Benefits

Another benefit to matching employee contributions is that your business is able to claim a tax deduction, depending on the tax situation of your business. Also, since the employer contribution is coming out of the employee’s pay cheque, you do not have to withhold payroll tax. Although the benefit is taxable and has to be reported on a T4 slip, you do not have to deduct income tax at source on the contributions you make to an employee’s RRSPs if you have reasonable grounds to believe that the employee can deduct the contribution for the year. To report the benefit, put the taxable amount in box 14 under Employment Income and in the Other Information area under code 40 at the bottom of the T4 slip.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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