Definition
A Deferred Profit Sharing Plan (DPSP) is a type of employer-sponsored Canadian retirement savings plan. It involves the employer sharing a portion of its pre-tax profits with employees by making contributions to their individual retirement accounts. The deferred part means that the employees gain access to the shares of profit in their account, tax-free, only upon retirement or under other specified conditions.
Phonetic
The phonetic transcription for “Deferred Profit Sharing Plan (DPSP)” would be: Deferred: /dɪˈfɜːrd/Profit: /ˈprɑːfɪt/Sharing: /ˈʃeərɪŋ/Plan: /plæn/DPSP: /ˌdiː piː esː piː/
Key Takeaways
“`html
- Employer Contributions: A Deferred Profit-Sharing Plan (DPSP) is a profit-sharing plan in which the employer contributes a portion of its pre-tax profits to the plan. These contributions depend on the company’s business performance and are not guaranteed.
- Tax Deferred Growth: The contributions made by the employer grow tax-deferred in the DPSP until the time of withdrawal, which usually happens upon retirement. This makes DPSP a great tool for employees to increase their savings for retirement.
- Vesting Period: DPSPs usually come with a vesting period, meaning that employees will only be vested or “own” the contributions made by the employer after completing a specific period of service with the employer. This encourages employees to stay with the company longer to maximize the benefits from the DPSP.
“`
Importance
A Deferred Profit Sharing Plan (DPSP) is a crucial business and finance term, as it represents an employer-sponsored plan designed to boost the financial security and retirement opportunities of employees. In a DPSP, the employer contributes a portion of its pre-tax profits to the plan, which are then invested on the employees’ behalf. These contributions and the investment earnings generated will only be taxed once they are withdrawn by the employees upon retirement. This type of plan provides significant incentives for employee motivation and retention, as it imparts a sense of ownership and direct participation in the company’s success. Overall, it enhances long-term employee welfare and the overall financial health of the business.
Explanation
A Deferred Profit Sharing Plan (DPSP) is known to serve the purpose of providing a highly beneficial financial mechanism within the corporate environment. This plan essentially allows companies to share their profits with their employees, thereby ensuring that the workforce reaps the benefits when the company does well profit-wise. The primary use of a DPSP is focused on establishing worker loyalty, improving the overall employee morale, and fostering a more dedicated and motivated workforce. By providing workers with a share in the company’s success, they are incentivized to contribute positively to the company’s performance and productivity.DPSPs are also used as a tool for employee retention and as a complement to traditional pension plans. As the profits of the business increase, so too does the contribution made to the DPSP which although, deferred, is a promising future payout for the employee and a compelling reason to stay committed and work towards the company’s growth. Delving in further, the “deferred” aspect signifies that the benefits from the profit shared will be postponed or delayed until the employee leaves the company or retires. Hence, DPSPs are beneficial both for the companies in terms of employee productivity and for the employees as it serves as a form of additional compensation and future financial security.
Examples
1. Canada Post Corporation: Canada Post Corporation, a renowned postal service company, offers a Deferred Profit Sharing Plan (DPSP) to its employees. Under this plan, a certain percentage of the company’s profits are put into the DPSP for eligible employees. These funds are then either invested or shared amongst the participants, helping to motivate the employees and promote growth within the company. The disbursement usually occurs after a set period, such as when the employee reaches retirement age, leaves the company, or dies.2. Ford Canada: Ford Canada offers a DPSP as part of its employees’ compensation package. The company’s profits are channelled into the DPSP and later distributed amongst its employees, fostering a sense of partnership and shared success. This provision impacts the workforce positively by serving as a deferred incentive and enhancing employees’ financial security during their retirement years.3. Sun Life Financial: Sun Life Financial, a prominent international financial services organization, provides its employees a Deferred Profit Sharing Plan. This includes a specific percentage of the company’s profits being set aside and invested for employees’ future benefits. The arrangement stimulates a shared culture of progress, encouraging staff to work towards the company’s profitability as this directly benefits their personal financial positions in the future.
Frequently Asked Questions(FAQ)
What is a Deferred Profit Sharing Plan (DPSP)?
A Deferred Profit Sharing Plan (DPSP) is a profit-sharing plan in which profits are shared with employees, but not immediately. The benefits are deferred until a specified time, typically when the employee retires.
Who can participate in a Deferred Profit Sharing Plan (DPSP)?
Any employee is eligible to participate in a DPSP as long as they meet the criteria outlined by the employer in the plan. This often includes a minimum period of employment.
Which payments are excluded from a DPSP?
Payments such as employee bonuses, overtime pay, and other special payments are excluded from a DPSP.
When can I receive benefits from a DPSP?
Normally, benefits from a DPSP are received when the employee retires, becomes disabled, or dies. However, specific plans may allow earlier withdrawal under certain conditions.
Are contributions to a DPSP tax-deductible?
Contributions made by the employer to the DPSP are tax-deductible for the business. However, employees are not taxed on these contributions until they are received as income.
How is a DPSP different from a Pension Plan?
While both are forms of retirement savings, a main difference is that DPSP contributions are often dependant on the company’s profitability, whilst pension plans typically have fixed contribution amounts.
What happens to my DPSP if I leave my job?
If you leave your job, your DPSP usually continues to accumulate earnings tax-free until you start to withdraw it. However, specifics may vary depending on the individual plan and company policy.
Are there any penalties for early withdrawal from a DPSP?
Early withdrawal from a DPSP may attract financial penalties and tax implications. Always consult your plan administrator or financial advisor before making any decisions.
Is there a limit to how much can be contributed to a DPSP?
Yes, there’s a limit to how much can be contributed to a DPSP in a given year. The specifics can depend on factors like the employee’s earned income, pension adjustment, and the current year’s DPSP dollar limit.
: How is a DPSP affected by changes in the company’s profitability?
: Since a DPSP is a profit-sharing plan, changes in the company’s profitability can influence the amount contributed to the plan. Higher profits generally mean higher contributions and vice versa.
Related Finance Terms
- Employer Contributions
- Vesting Period
- Retirement Savings
- Tax-Deferred Growth
- Profit Sharing Ratio
