There are some significant changes coming to effect in 2019 on the issue of Canada Pension Plan. This is why it is a good idea to get ready early.
Companies should be prepared to keep their private sector pension plans or group RRSP, with the fact that they are going to pay a little more for CPP.
There are new rules coming into force in 2019. This might seem like you still have a lot of time, but it is important for business owners going to be affected by these enhancements to start planning for these changes as early as possible. “If you are a business owner, it’s a high time to start thinking the impact on your company,” says Dan Kelly, the CEO, and president of Canadian Federation of Independent Business, a body representing over 100,000 small and medium-sized business.
What is changing?
The first step a business owner should take is familiarizing themselves with the new rules. The amendments proposed will allow retired Canadians to get higher CPP benefits that they are currently getting. The current CPP retirement is 25% of the average adjusted earnings of the worker. The amendments will increase this to 33%.
The two types of contribution will be phased in:
- Starting in 2019 and ending 2023, the employer and employee contribution rates will increase by 1%, with the current being 4.95% of earnings. This means the employee contributions will be at 5.95% by the year 2023, paid on earning between $3,500 with the upper limit knows as the YMPE or maximum pensionable earnings. An employee getting $50,000 a year will contribute $500 more each year as from 2023, and the employer is making the same contribution for each of the employee.
- Beginning 2024, there will be an increase in the maximum amount of earning subjected to CPP. This will be done over a phase of two years, where the maximum will go up by 7% in 2024 then another 7% in 2025, which will mean an increase of 14% in the two years. Employees and employers will then have to contribute 4% more on what they will earn between the YMPE and the new upper limit earnings that have been projected to be $82,700 by the year 2025.
For a person getting $50,000 in constant earning over their working life will expect to get an annual CPP benefit that is $4,000 more (in 2016 dollars) than what they would receive in 2016. Business having several employees can expect to pay a lot more. How can owners prepare for these new rules?
Determine the increase you will paying
Employers should do a detailed projection on estimating the additional costs they will incur during the different phases and into the future. Will this affect your ability to hire and give raises to employees? Will you need to make changes to the benefit formulas if you have a defined benefit plan for the employees that have been integrated into the CPP system?
Don’t abandon retirement saving pans of your employee
Despite the fact that they have to pay more, it is important for companies to aim at keeping their private sector pension plans or group RRSP. “If a business decides to drop these plans because of the changes, they may end up losing something that is important in retaining their workforce.”
Ensure your employees understand the changes
It is essential to ensure your employees fully understand these changes before they come into effect. When the changes take place beginning January 1, 2019, their earning will drop. They need to know that these increased CPP benefits will take 40 years before they kick entirely in, and this depending on their age mean getting minimal benefits from these changes.
Consider going for a third-payroll service
Calculation of CPP deductions will become a little more complicated when the changes take place, even small businesses that usually do payroll on their own should consider outsourcing it to a payroll company. “It will be a little trickier than in the past because there will be five years of increase in premiums, and then two years of upper earning limits after that.”
More CPP for self-employed
You need to know you are paying both the employer and employee CPP contributions for your business. For earnings of $50,000 a year, you can expect to pay an extra $1,000. To accommodate the increase, you may consider selling more or your products or services.