June 29, 2005

Investment Corner

By John Niekraszewicz

A sensible solution

Ted was driving home from the office making plans for the weekend and thinking about how well his company, ABC Products has been doing over the last few years.

Profits have been impressive. Ted was also thinking about how fortunate he is to have such hard-working, loyal employees — most have really gone that extra mile to get the job done.

He realized it was time to do something to thank his employees — something that would give them a reason to commit to the business for the long-term.

Ted has considered contributing to his employees’ retirement savings, but he’s been through bad times before and has some reservations about the financial burden this might put on the company, particularly during an unprofitable year.

A good solution for Ted is a Deferred Profit Sharing Plan (DPSP). A DPSP is a tax-sheltered plan used by employers to build a retirement fund for employees based on a share of the company’s profits.

It’s cost-effective, flexible and easy to set up.

The company’s taxable earnings are calculated after contributions have been made to their employees’ DPSP accounts. Any contribution made towards the employees’ savings actually reduces the company’s taxable earnings.

ABC Products’ contributions are exempt from federal payroll taxes, including CPP, EI and other applicable provincial payroll taxes. DPSP contributions are not a taxable benefit to the employees. This could mean additional savings.

Ted can decide how much and how often to contribute. Since the employer is not required to make contributions to a DPSP in any given year it does not impose a heavy financial burden.

Sharing company profits usually provides employees with a sense of company ownership. This is a great way to get top performance from employees.

ABC Products’ Deferred Profit Sharing Plan can be designed with a vesting schedule that encourages long-term thinking — a great way for Ted to retain good employees and give them a reason to commit to his company.

John Niekraszewicz, B.Math, FCSI, CFP, is a certified financial planner and president of JVK Life & Wealth Advisory Group.

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