What Is Pension Adjustment Reversal?
Pension Adjustment Reversal (PAR) is an option for workers whereby they can adjust retirement benefits by adding to a Registered Retirement Savings Plan (RRSP) and Pooled Registered Pension Plan after withdrawing early from a Deferred Profit Sharing Plan (DPSP) or a Registered Pension Plan (RPP) with an employer.
Understanding Pension Adjustment Reversal (PAR)
A PAR is used in Canada to add to an individual’s Registered Retirement Savings Plan or Pooled Registered Pension Plan when they depart a DPSP or an RPP as an employee.
The PAR reduces the amount of money that has been contributed to the pension plan for an employee in a given year, thereby increasing the RRSP deduction limit.
A PAR can occur, for instance, when an employee leaves a company after a short period and before that employee is vested. In such cases, the employer may not yet have contributed to the employee’s pension fund. If this is the case, the pension is composed only of the employee’s contribution, and employer contributions are not counted.
Eligibility for Pension Adjustment Reversal
To be eligible for a PAR, the employee does not necessarily need to end employment with a company. Employees may initiate a pension adjustment reversal by terminating membership in the pension plan and transferring benefits to an RRSP.
Once a plan participant is vested or has received tangible benefits, including employer matching funds, they are no longer eligible for a PAR. Additionally, an employee who leaves a company but continues membership in the pension plan is not eligible for the PAR.
Calculating the Pension Adjustment Reversal for a DPSP
A DPSP is an arrangement under which an employer may share profits from their business with all or a specified group of employees to provide benefits. Contributions are typically stated as a percentage of the employer’s profits or employee’s earnings. Members cannot contribute to a DPSP. These plans are governed by the Act and Regulations and are not subject to provincial pension legislation.
Under a DPSP, a PAR must be calculated for an individual who terminated membership after 1996 for a reason other than death and received no installment payments under the plan.
The PAR is calculated as the total of all amounts included in their pension credits up to the date of termination that the account holder was not entitled to receive at the time of termination. Earnings on allocations or contributions are not included in the PAR.
The total of an individual’s pension credits includes the pension credit for the year of termination, even though this pension credit may not be reported until after the PAR is reported. Therefore, an individual will need to consider any unvested amounts, including forfeitures allocated to an individual in the year of termination, when calculating the PAR.
Calculating the Pension Adjustment Reversal for RPP
An RPP is an arrangement by an employer to provide periodic payments to individuals after retirement and until death for their service as employees. An RPP is subject to the Act and Regulations, and may also be regulated by provincial and federal pension legislation (for example, the Pension Benefits Standards Act).
Under an RPP, a PAR must be calculated for an individual who terminated membership after 1996 for a reason other than death and received no retirement benefits under the plan. It is calculated in the same way as it is under the DPSP, and the same conditions apply with respect to unvested amounts.
Any amounts allocated after the person has quit the plan will be included in a pension credit at that time but will not affect the PAR that has already been calculated.