Defined contribution pension plan

A defined contribution plan is one of the staff benefits to identify early when buying a business with employees. The CRA’s registered pension plan glossary says a money purchase plan, also known as a defined contribution plan, is one where each member has one or more accounts to which contributions and earnings are credited. It adds that the contribution rate determines the amount contributed to each member’s account.

What the rules say

The CRA glossary says the Income Tax Act requires a minimum contribution rate on behalf of the employer for money purchase plans, as well as a maximum combined rate for employers and employees. This entry gives no rates; read the Act and the plan text. In Ontario, the Pension Benefits Act defines a defined contribution benefit as a pension benefit determined with reference to and provided by contributions, and the interest on them, paid by or for the credit of a member and determined on an individual account basis.

What to ask

• Whether the plan text sets the contribution rate, and which employer is the participating employer.
• Whether any provision is a defined benefit provision, which the CRA describes as any provision that is not money purchase.
• Whether employer contributions are up to date and which pension standards law governs the plan.