Employer FAQs About Pension Adjustments
Here are answers to questions from employers calculating pension adjustments (PA) in readiness for reporting on T4 information slips.
Refer to Appendix A: PAs, PSPAs, and PARs in HOOPP’s Administration Manual for more information on PAs. Remember as well that an online PA Calculator is available.
Q. Where do I find the PA formula?
A. Appendix A of HOOPP Administration Manual. You can also use HOOPP’s PA Calculator.
Q. Are PAs needed for all terminating members?
A. Yes. A pension adjustment, which a member receives each year, reduces the amount a member can contribute to an RRSP. The member will get a pension adjustment reversal (PAR) if the termination benefit he or she receives (relating to service earned after 1989) is less than the sum of all the PAs and any past service pension adjustments (PSPAs) the member received in respect of the service. (A PSPA also reduces RRSP room.)
A PA is used to calculate a PAR, which may restore RRSP contribution room to members who choose to transfer all their benefits out of a registered pension plan (RPP) upon termination of membership.
A PAR only occurs when a member chooses to transfer all of her benefits out of a registered pension plan – in this case, HOOPP – upon termination of Plan membership. However, if a PA isn't reported on a Notice of Termination, HOOPP does not have all the information needed to estimate the PAR that would result if the member decides to move benefits out of HOOPP. This means the member doesn't get all the information he or she might need to make an informed decision about whether or not to leave the benefits in HOOPP or transfer them out.
Q. Do PAs go up when contribution rates change?
A. No, PAs are not affected by changes – up or down – in contribution rates. The only time a PA changes is if a change is made to HOOPP’s benefit formula. The formula has not changed since December 1998.
Q: Why is a PA higher than contributions?
A: You may hear it every year at T4 time from some Plan members you employ - why is their pension adjustment higher than their HOOPP contributions? Because HOOPP is a defined benefit pension plan, it's important for members to know that their PA is based on the benefits they earn, not their contributions. PAs are higher than their contributions because PAs are a reflection of the deemed value, set by the Income Tax Act, of the pension benefits they have accumulated during the tax year.
Q. The manual says to use the member’s annualized earnings to calculate the benefit entitlement. Which rate should I use if the member had an increase part way through the year?
A. Because the PA reflects the benefit earned in the year, the annualized earnings (AE) used in the PA calculation must reflect the AE that HOOPP credits the member with.
The AE credited to a member comes from the contributory weeks and contributions reported to HOOPP each year. If contributions are made on two AE’s across a year, the overall AE that is credited will be a blend of the two. This means that when calculating the benefit entitlement for PA purposes you must also use an AE that is blended across the two.
Q. We paid out a retro in 2006 that changes members' 2005 annualized earnings (AE). Do I have to recalculate the 2005 PAs for these members?
A. No, it is not necessary to change a previous year's PA, but because the retro does adjust the 2005 AE this increase must be taken into account when calculating the 2006 PA. The 2006 AE must be increased for PA purposes to reflect the retro. Refer to Appendix A: A Guide to PAs, PSPAs, and PARs in the Administration Manual for details how to calculate a PA when there has been a retroactive salary adjustment.
Q. We had 27 bi-weekly pays - does this affect the PA calculation?
A. Yes, contributory weeks are used in two places in the PA calculation, first in calculating the member’s benefit entitlement and also when calculating the $600 offset.
In the benefit entitlement calculation, because the member is earning an additional two weeks of benefit, you must use the 54 weeks. However, the additional two weeks should not be used when calculating the $600 because this is the maximum offset. Refer to Appendix A: A Guide to PAs, PSPAs, and PARs in the Administration Manual for an example of calculating a PA where there are 27 bi-weekly pay periods.
Q. Each year I have to wait for HOOPP to provide me with the PAs for members who were away from work on a health leave. Why is this?
A. A member absent for more than 15 weeks for reason of ill-health is entitled to free accrual. Free accrual is contributory service for which no contributions are required by either member or employer. HOOPP determines a member’s eligibility and rate of free accrual that can be credited.
Since the PA is based on a member’s benefit entitlement the employer cannot calculate the benefit entitlement.
