How Pension Adjustments Affect Contribution Limits
Effective July 2, 1999
Each year, in accordance with the Income Tax Act, pension adjustments (PAs) are calculated for members of registered pension plans, such as the Public Service Pension Plan (PSPP), to determine the value of the pension benefit. This amount is used to reduce the RRSP contribution room. The PA is also used to determine the 'contribution maximum', which is the maximum amount that a member can contribute each year to a registered pension plan.
The contribution maximum is calculated as 70% of a member's PA, plus an additional $1,000. The PA is based on the pension credit accrued in a year. Currently, members who accrue a full year of pension credit and who reach the maximum PA of $14,900 can contribute a maximum of $11,430 a year. If their membership begins or ends during the year, their PA - and, in turn, their contribution maximum - will be lower. For example, if a member terminates on June 3, the PA will be calculated based on the number of days of pension credit accrued to this date. If the PA is $5,000, the member cannot contribute more than $4,500 in that year (70% of $5,000; plus $1,000).
PSPP members whose annual salary is more than $150,000 are affected by the contribution maximum. At that salary, their annual contributions to the PSPP start to exceed $11,430. Generally, a member's contributions over the limit are remitted to the Public Service Supplementary Benefit Account (the "Account") and used to fund a separate benefit that is payable from the Account when they terminate or retire. These contributions are not tax deductible. However, there are 'special' members who contribute to the PSPP only (up to the contribution maximum) and not to the Account. These 'special' members are employees of the Teachers' Pension Plan Board and appointed members of the Ontario Securities Commission.
The following procedures apply to members whose annual salary is over $150,000.
For 'Special' Members:
At the beginning of the year, or when the 'special' member joins the PSPP during the year, estimate the PA by assuming that he or she will stay in the PSPP until the end of the year at the same salary. Determine the contribution maximum. This is the estimated contribution amount, which can be spread out over the remaining pay periods.
At the end of the year, or when the member terminates before the end of the year, calculate the PA based on the pension credit accrued in that year. Using this PA, determine the exact contribution maximum. Compare this amount to the contributions made to date to determine how much the employer must collect from or refund to the member.
For 'Other' Members:
These members pay the contribution maximum to the PSPP, and any contributions above this maximum to the Account. 'Other' members include employees of the Ontario Securities Commission who are not appointed members of the Commission.
At the end of the year, or when the member terminates before the end of the year, calculate the PA based on the pension credit accrued in that year. Using this PA, determine the exact contribution maximum. Please notify us of this amount as soon as possible, so we can ensure that the correct contributions are paid to the PSPP and the Account.
Reporting Contributions on the T4
The RPP contribution box on the T4 slip should show only those contributions made to the PSPP (i.e., the contribution maximum) in the applicable year, and any buy-back contributions that were paid in the same year. Contributions payable to the Account should not be included on the T4 slip, as they are not tax deductible.