Newsletter – Pensions by Accountant Mississauga

Freedom 65 or is it 70?

New CPP rules affect employees over 60.

In 2009, important changes were made that affect contributions and pension benefits for the five-year period 2011 to 2016. The purpose of these changes is to adjust benefits actuarially according to whether a person chooses to take those benefits before or after age 65.

Today
Under current legislation, individuals already receiving CPP benefits, and those who have deferred receiving benefits but have reached the age of 70, do not make CPP contributions. If benefits are taken before age 65, the amount is reduced by 0.5% per month for each month the pension is taken before the age of 65. For example, a person taking benefits at age 60 would have the benefit amount reduced by 30% (5 years x 12 months x 0.5%). If, however, the person begins taking the benefits sometime between their 65th and 70th birthdays, the amount increases by 0.5% for each month deferred. For example, if a person does not start taking the benefits until age 70, the pension amount increases by 30% (5 years x 12 months x 0.5%).

Starting in 2011
The following changes will be phased in during the five-year period:

1. The CPP monthly pension amount will increase by 0.57% in 2011, 0.64% per month in 2012 and 0.70% in 2013 for each month the person defers taking the pension in the years between 65 and 70. For example, a person who becomes 70 in 2013 or later would enjoy a 42% increase in monthly benefits (5 years x 12 months x 0.70%).
2. Beginning in 2012, the CPP monthly pension amount will decrease by a larger percentage if taken before age 65. The standard reduction will be 0.52% in 2012 and rise annually until it reaches 0.60% in 2016. Thus, a person reaching age 60 in 2016 who chooses to take the pension then would see the monthly amount reduced by 36% (5 years x 12 months x 0.60%) compared with what would be received if they had waited until age 65.
3. The number of low or zero earnings years automatically dropped from the monthly pension calculation will be increased in the years 2012 and 2014.
4. Effective 2012 employees will no longer have to stop working in order to start receiving their benefits.
5. Employees over 60 but under 65 and receiving benefits while still working will be required to make CPP contributions.
6. Employees 65 to 70 and receiving benefits while still working will be able to choose whether they wish to continue contributing.
7. Self-employed or employed individuals who started to collect their pension, disability or survivor benefits prior to 2011 will not be impacted by the new rules.

Employers are required to match contributions of employees over 65. The Impact
The impact on employers is not obvious at first blush but there are some interesting considerations that each employer and self-employed individual will have to address when hiring new staff.

All employees who reach the age of 60 but have not yet reached 65 will have to have CPP contributions deducted from their pay. All employers will still have to contribute an equal amount of CPP premium on behalf of the employee.

If an employee is over 65 and opts to continue to pay CPP premiums, the employer will have to match the CPP premium contributions made by the employee.

Efficiency and Effectiveness
An efficiency-and-effectiveness review of each stage of any process should be able to determine where major costs in time and energy are incurred. For example, if the suppliers provided the required supplies to a building site on time, would the number of times staff needs to return to the job site be reduced, thereby cutting gas consumption and staff time, thus increasing the profit on the project?

New Rules Affect Payroll
As can be appreciated, the new rules could have a significant impact on payroll, especially if there are a large number of employees between the ages of 60 and 65 who are already receiving their pension benefits. Under the old rules, the employer was not required to withhold CPP once the employee was taking benefits and therefore was not required to provide any matching contribution. The new rules will mean the employer will have to both withhold and match the contribution. Employers with long-term employees in this age group and making maximum contributions to CPP will have to consider factoring an additional cost into operating budgets. For 2011, the maximum earnings level for contributing is now $48,300; after deducting the $3,500 basic exemption, the calculation for the employee’s amount at a rate of 4.95 percent works out to $2,217.60. This is the figure the employer will now have to match for each employee previously exempt from contributing.

If an owner-managed business has 10 employees in this age range, the cash flow requirement amounts to an additional $44,352 per annum ($3,696 per month), a figure large enough to have a significant impact on the employer’s bottom line.

Self-employed Individuals Will Contribute Twice
Self-employed individuals in the 60-65 age bracket who opted for early CPP benefits will take the same hit as their employed peers. Given the $48,300 maximum eligible earnings level, individuals filing as self-employed will be required to pay $4,435.20 per year which represents the individual’s share plus the “equivalent of an employer’s share”. In other words, the self-employed person will in effect contribute for himself as an employee and match himself as an employer. To offset the overall cost to the self-employed, the rules allow for a tax credit on the “equivalent to employer’s share” of $2,217.60. This amounts to 15% of the $2,217.60 or $332.64 and reduces the cost of CPP to $4,102.56.

Naturally, self-employed individuals who hire employees will be subject to the same deduction requirements as incorporated owner-managed businesses.

Employees Over 65 May Defer Benefits
Employees between 65 and 70 may elect not to apply for CPP benefits. Employers are nevertheless required to deduct and match the contribution until the end of the month, before the month the pension becomes payable or the month in which the employee turns 70. To be clear, employers must remit for employees aged 60 to 65. It is the employee’s choice to opt out of paying between ages 66 and 70.

Make sure employees understand how changes affect them.

Minimizing the Impact of CPP
It is extremely important for owner-managers and self-employed individuals to be aware of these changes and be compliant. It is also very important to make sure employees understand how the changes affect them.

• human resources date-of-birth records to ensure employee data is up to date
• payroll records to find all employees between 60 and 65 and modify CPP deductions accordingly
• payroll records to find those employees between 65 and 70 who have already applied for CPP and ensure their files contain a copy of the “award letter” mentioned above
• cash flow requirements to make sure sufficient cash flow is available to meet the additional cash output for the employee and employer share of CPP
• job costing and charge-out rates to ensure profit on contracts is not adversely affected by increased payroll costs
• all software used to calculate CPP deductions to make sure it has been reprogrammed to take into account the changes in contribution requirements under the new legislation. It may be necessary to review each individual or record to ensure the database reflects the necessary deduction.

Mission Statement
Essential to this process is a realistic mission statement that outlines your company’s green objective. A mission statement that indicates you plan to reduce your dependency on fossil fuels to zero sounds noble, but, a more realistic vision might be: “We will reduce our dependency on fossil fuels by 50% within five years.” Perhaps your business might work only with suppliers who use recycled products, or reduce on-site waste to zero. Whatever the goal, it must be achievable within the economic limits of your business.

The Time for Action is Now
On the surface the change to CPP requirements seems innocuous enough. Upon deeper examination, however, the changes will impact the owner-manager significantly by increasing payroll costs, skewing cash flow requirements and adding to the administrative costs of human resources and payroll departments. Forward planning to identify affected employees will reduce the risks of fines and penalties and ensure employees get the full benefits of the CPP when they choose to take them.

October 2011

This issue’s topics deal with:

• Freedom 65 or is it 70?
• Tablets
• Using Email Efficiently
• The Importance of Being Civil