17 February 1994 Internal T.I. 9402616 - EMPLOYEE CONTRIBUTIONS TO FUND PENSION UNFUNDED LIABILITY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether employee current contributions to pension plan can be used to satisfy the plan's unfunded liability.

Position TAKEN:

Unsure.

Reasons FOR POSITION TAKEN:

Not just a question of interpreting the words - actuarial advice may be needed.

				February 17, 1994

	Head Office	Head Office
	Registered Plans Division	Rulings Directorate
	Stella Black	(613) 957-8953
	Director
	Attention:  Hilde Sorensen
			940261

Employee Contributions in Respect of Unfunded Liabilities in Registered Pension Plans

This is in reply to your memorandum of February 2, 1994, in which you ask our views concerning the use of members' current contributions to cover a pension plan's unfunded liability.

LAW

As you point out, the relevant provisions are contained in paragraphs 8502(b) and 8503(4)(a) of the Income Tax Regulations (the "Regulations") which set the limits on member contributions to defined benefit plans.

Paragraph 8502(b) states that such contributions must be paid "in accordance with the plan as registered" and "in respect of the member's benefits under a defined benefit provision of the plan". Paragraph 8503(4)(a) restricts current funding to the lesser of (a) 9% of their compensation and (b) 70% of the member's pension credits under the pension plan plus $1000. Conditions in paragraph 8503(4)(a) may be waived, however, if the Minister finds the method of determining current member contributions to be acceptable and, furthermore, on a long-term basis the regular current contributions will not exceed 1/2 of the amount that is required to fund "the aggregate benefits in respect of which those contributions are made" (paragraph 8503(5) of the Regulations).

ANALYSIS

In our view the crux of the issue is whether the condition in paragraph 8502(b) of the Regulations can be satisfied, namely, that the contributions used to satisfy an unfunded liability can be considered to be "in respect of the member's benefits". As you point out, such a liability results from the experience of the plan over time - under-estimating the benefits to be paid out or over-estimating the income earning potential of the fund.

It is difficult to perceive how the use of a member's contribution to satisfy a portion of a defined benefit's plan unfunded liability results in that contribution being paid "in respect of" that individual member's benefits. It may be that you should obtain the advice of an actuary, however, to establish if this is possible.

We also note that in plans where a "net contribution account" (defined in paragraph 8503(l)) is maintained for each member for purposes of paragraphs 8503(2)(h) and (j) and subsection 8517(2), each contribution must be credited to the account of the member who makes it. There is a direct tracing of the amounts paid in and out with respect to each member; if you can conceive of a plan under which such accounts are maintained and member contributions can be credited to the accounts and also used to satisfy an unfunded liability, then we would agree that an agreement between employer and employees to share the cost of a plan's unfunded liability could be implemented.

The Technical Notes for paragraph 8503(4)(a) of the Regulations explain that the purpose of limiting member contributions is to ensure that they are not out of proportion to promised benefits. The restriction on the Minister's discretion to waive those limits as set out in subsection 8503(5) is for the purpose of ensuring that the members do not fund more than 50% of the benefits they will receive. In our view, a proposal to have the members and employer share the costs of unfunded liabilities might subvert the purpose of these provisions.

CONCLUSION

We offer the foregoing comments for your assistance but are unable to provide a definitive answer. As suggested above, the advice of an actuary may assist you in reaching a conclusion.

for Director
Financial Industries Division
Rulings Directorate