Where a delay inadvertently occurs in the commencement of pension benefit payments to a member or his/her survivor, the obvious remedy is for a lump sum catch-up payment to be made out of the pension plan on account of the missed pension benefits. Such a payment in lieu of regular benefits, however, is problematic under the income tax rules in that, among other things, it results in the plan not being administered in accordance with its terms and also breaches the rule that pension benefits be paid in “equal periodic amounts”. For many years, it was the position of Canada Revenue Agency’s Registered Plans Directorate (“RPD”) that in appropriate circumstances it would provide administrative relief for lump sum payments of this nature but on a case-by-case basis only. This process required plan administrators to submit a written request to RPD in each instance that a plan member was owed missed pension benefits and to await RPD approval prior to making the lump sum catch-up payment. The need to apply for administrative relief in every instance was a concern to plan administrators who found it both cumbersome and time-consuming.
In May this year, RPD announced that it was considering a significant change to the administrative relief process for lump sum payments representing missed pension benefits. This announcement was the subject of a May 2009 Borden Ladner Gervais Pension Alert. The announcement, while welcomed by the pension community, provided few details regarding how the new administrative relief procedures would work. These details have now been provided by RPD in its recently released Newsletter No. 09-1 and related Frequently Asked Questions (“FAQs”).
Under RPD’s new procedures plan administrators may now, in certain circumstances, make lump sum payments in lieu of missed pension benefits without obtaining prior RPD approval, but must provide details of the payments to RPD by way of an annual report. The Newsletter, among other things, identifies the types of situations that are eligible for this process and the information required to be provided by the plan administrator on the annual report.
Highlights are as follows:
1. Benefits eligible for this new procedure: The lump sum payment must represent missed pension payments that otherwise should have been paid as of the member’s date of retirement under the plan. Also acceptable are:
- catch-up payments following the approval by a provincial authority to restore benefits previously reduced;
- benefit underpayments caused by involuntary administrative errors or systemic problems in the calculation of the original benefit; and
- lump sum payments to the member’s surviving spouse or beneficiary that meet these criteria.
2. Annual Report: Administrators must provide to RPD a list of lump sum catch-up payments made at least once per calendar year. The Newsletter sets out the information which must be included in the report. Among other things, the plan administrator must provide details regarding the affected member, the period of missed payments, the periodic pension amount, the rate of interest (if any) paid, the total lump sum catch-up amount, and the reason for the delay in pension commencement.
3. Exemption from reporting: A lump sum catch-up payment that satisfies the criteria described in 1 above and does not exceed $500 per member is exempted from the annual reporting requirement.
Considerably more detail is provided in the Newsletter and the FAQs. Plan administrators contemplating the payment of a retroactive lump sum catch-up payment should carefully review these RPD documents before proceeding. The Newsletter and FAQs are available on CRA’s website.