Significant changes to the Canada Pension Plan come into effect in 2019. Start getting ready now.
Despite having to pay more for CPP, companies should aim to keep their group RRSP or private sector pension plans.
In 2019, new CPP rules will come into force. While that may still seem like a long time away, business owners impacted by the new enhancements need to start planning for the changes today. “If you are a small business owner, now’s the time to start thinking about how this will impact your company,” says Dan Kelly, president and CEO of the Canadian Federation for Independent Business, which represents more than 100,000 small- and medium-sized businesses.
The first thing business owners need to do is to become familiar with the new rules. The proposed amendments will allow retired Canadians to receive higher CPP benefits than they do now. Currently, the CPP retirement benefit is 25% of a worker’s average adjusted earnings. With the amendments, this will increase to 33%.
Two types of contribution increases will be phased in:
- Starting in 2019 and ending in 2023, there will be a phased-in increase of 1% in the employee and employer contribution rates, which is currently 4.95% of earnings. By 2023, the employee contribution percentage will be 5.95%, paid on earnings between $3,500 and an upper limit known as the year’s maximum pensionable earnings, or YMPE. An employee earning $50,000 a year will contribute nearly $500 more annually in 2023 and future years, while an employer will pay a similar amount per employee.
- Starting in 2024, there will be an increase in the maximum amount of earnings that are subject to CPP. This will be phased in over two years: the maximum will go up 7% in 2024 and another 7% in 2025, for a total increase of 14%. Employees and employers will contribute an additional 4.0% on whatever they earn between the YMPE and this new upper earnings limit, which is projected to be $82,700 in 2025.
A person with $50,000 of constant earnings during his or her working life will receive an annual CPP benefit that is about $4,000 higher (in 2016 dollars) than what they would receive in 2016. Businesses with several employees could end up paying a lot more. Here’s how owners can prepare for the new rules.
Determine how you will pay for the increases
Employers should conduct detailed projections to estimate what their additional costs will be during the phase-in period and into the future. Will it affect your ability to hire or give your employees raises? If you have a defined benefit plan for your employees and it’s integrated with the CPP system, will you need to change your benefit formulas? “Some businesses have told us that the additional contributions will come out of employee compensation in some way,” says Kelly.
Don’t abandon your employee retirement savings plan
Despite having to pay more for CPP, companies should aim to keep their group RRSP or private sector pension plans. “If a business drops its plan in response to CPP changes, it may lose something that has been helpful in attracting and retaining its workforce,” Kelly says. “The CPP changes affect all employers, so getting rid of your employee pension plan will work against you if you are trying to distinguish your business.”
Make sure your employees understand the changes
It’s important that employees understand the changes before they come into effect, because come January 1, 2019, they will see their earnings drop – unless their employer decides to make up the difference. They should also understand that because the increased CPP benefits take 40 years to completely kick in, they may, depending on their age, benefit very little from the changes.
Consider a third-party payroll service
Because calculating CPP deductions will become more complicated once the changes are in effect, even small businesses that normally handle their own payroll may want to outsource the job to a payroll company. “It will be trickier than in years past because there will be five years of a premium increase, and then an increase in the upper earnings limit for two years after that,” says Kelly.
More CPP for self employed
Be aware that you pay both the employee and the employer CPP contributions for your business. If you earn $50,000 a year, you will pay about an additional $1,000. Depending on your circumstances, you may need to sell more of your personal services or products to accommodate this increase.