Business Answered: What is ORPP (Ontario Retirement Pension Plan) and how does it affect me?
If you haven’t already, then you will be hearing more and more about the ORPP in the coming days. As a business owner (large or small) in Ontario, it is important to get an understanding of what ORPP is and how it affects you and your employees. Here is the answer to the most important questions surrounding this plan.
What is the ORPP?
The ORPP stands for Ontario Retirement Pension Plan. It is (as the name suggests) a pension plan that is managed by the province Ontario for its residents. It covers those people who currently do not have workplace pension plans, and will supplement their income upon retirement. Current estimates state that 3.5 million workers will participate in this program.
How will it work?
The structure of the ORPP is similar to the CPP (Canada Pension Plan). There are two types of contributions that increase this pool of retirement income:
1. Contribution from the employee through deductions in the payroll
2. Matching contributions from the employer
The amount of extra income, upon retirement, is contingent on:
1. Number of years that the employee contributes to the plan
2. How much he or she earns (salary), during these contribution years
Will I contribute to the CPP (Canada Pension Plan) if I join the ORPP?
Yes. The ORPP is in addition to the CPP contributions, and attempt to plug the gap for those employees who do not have workplace pensions.
What is the goal?
The ORPP is designed to provide approximately 15% of a worker’s pre-retirement income (up to a maximum cap), which is similar to the target goal for CPP payments. This means that both the CPP and ORPP payments in retirement could be similar for employees who contribute to both plans throughout their careers.
|Business Size||Contributions Start||Contributions at Maximum|
|Large companies (500+ employees)||2017||2019|
|Medium size businesses (50 – 499 employees)||2018||2020|
|Smaller firms (less than 50 employees)||2019||2021|
|All other eligible employees||2020||2021|
When will it start?
The government has created a schedule to start the contributions depending on the size of the business. It also has a 2 year phase in period between the start of the contribution and it reaching its maximum.
How much will it cost?
When the plan is completely phased in, employees will contribute 1.9% of their income to the plan, which will then be matched by the employer. For example: Jason earning $60,000 a year will contribute $3.12 per day, and the employer will match this amount. Also to be noted is that the contributions will only apply to the first $90,000 of income and not above it.
How much will I get when I retire?
Based on the current standards, an employee earning $45,000 and contributing to the ORPP over 40 years will earn a payout of $6,410 a year for the rest of their life, post retirement. An employee earning $90,000 would receive a benefit of $12,815. Also important to note is that the benefits will be indexed to inflation, so will rise over time.
Do I have to sign up?
No, because companies who don’t have workplace pension plans will enroll their employees. And if the company participates, then all workers must as well.
What if I’m self-employed?
Self-employed individuals are NOT covered by the ORPP. This is because currently the Federal Income Tax does not permit for self-employed individuals to participate in a registered pension plan. The Ontario government has requested the federal government to reconsider this stipulation so that self-employed individuals can join the ORPP.
Is the ORPP exactly like the CPP?
Yes and No. The structure is the same, and the difference is the income at which contributions max out.
– CPP contributions max out at the $53,500 income level.
– ORPP contributions max out at the $90,000 income level; which means higher salaried employees can earn a larger benefit.
Will all workers with company pension plans be excluded from the ORPP?
At the moment, the government has stated that only companies with “comparable” pension plans will be exempt. This is to ensure that all pension plans adhere to a certain standard, which provides adequate benefit in retirement. This question is currently under discussion and negotiation.
Will I have to change my personal investing goals if I am enrolled in the ORPP?
Personal circumstances will determine any adjustments to personal investing goals. Employees who are nearer to retirement don’t stand to benefit much from the ORPP benefits since their contributing years will be few. Those who stand to earn a larger benefit in their retirement from the new ORPP payouts, should factor this into their long term strategy.
There are many implications this new pension plan for all businesses in Ontario. If you want more information on how the ORPP will affect your business you can contact the partners at SRJ Chartered Accountants who have offices in Mississauga and Toronto. Our firm also work virtually with clients from all over Canada and globally. Please contact us directly by email (firstname.lastname@example.org) or by calling our office (647-725-2537).
How the ORPP will work:
- Employees and employers will contribute an equal amount, capped at 1.9% each (3.8% combined) on an employee’s annual earnings up to $90,000.
- 1, 2017, the plan rolls out for large employers (500 or more employees) without registered pension plans.
- Plan will be fully implemented by 2020.
- Plan will begin paying benefits to retired Ontarians in 2022.
- Once fully implemented, ORPP will require every Ontarian without a workplace pension plan to pay up to $1,643 in mandatory pension premiums every year. Employers will have to match the contribution amount for each of their employees.