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Plan sponsors with certain types of defined benefit pension (DB)
plans must familiarize themselves with the new grow-in rules which
came into effect on July 1, 2012. They may entitle terminating
employees to surprisingly, valuable benefits from the pension
plan.
The grow-in rules apply to DB pension plans that have
"early retirement enhancements". These are plans that
say, for example, that employees who meet certain types of age and
service criteria (such as a "rule of 80") are entitled to
start collecting their pensions prior to age 65, with little or no
reduction in the amount of their monthly pension.
The new rules extend the pre-July 2012 grow-in rules. If a DB
pension plan has never had to provide grow-in benefits on plant
closures or other partial wind-up events, the new rules will have
no effect.
The pre-July 2012 grow-in rules stated, generally, that if there
was a partial wind-up event, such as a plant closure, a terminated
plan member had the right to receive his early retirement pension
under the same terms as if he had continued as an employee and plan
member until reaching the early retirement eligibility age set out
in the plan text (as long as the member's age plus service as
at the date he actually terminates employment is 55 or more
– this is the "55 points" requirement). The
grow-in rules are complicated, so plan sponsors should obtain
expert advice on how they work.
The new extended grow-in rules will say that all terminating plan
members get grow-in (if they have "55 points"), whenever
they terminate employment, even if it's not a plant closure or
other partial wind-up event. The reason for this change is that
partial wind-ups no longer exist under Ontario pension law, which
is good news for plan sponsors. The bad news is that for some DB
plan sponsors, the extension of grow-in to all employee
terminations is potentially very expensive. It could result in a
large increase in the value of a terminating employee's
benefit. Employers with DB plans should make sure they're aware
of this valuable benefit when they structure severance
packages.
The new grow-in rules will apply to all employee terminations
after June 30, 2012. Terminating employees will not be entitled to
the grow-in benefit, however, if they:
quit;
were terminated due to willful misconduct, disobedience or
willful neglect of duty that was not trivial and was not condoned
by the employer;
were hired for a defined period of time, or for the completion
of a specific task;
are a "construction employee" as defined under
Ontario employment law;
are on a temporary lay-off as defined under Ontario employment
law; or
resign prior to the end of a notice period given by the
employer.
The grow-in rules will continue to apply to full plan wind-ups.
It is possible for certain types of plans (multi-employer pension
plans and jointly-sponsored pension plans) to opt out of the
grow-in rules.
FMC Law recommends that plan sponsors affected by these new
rules consider whether they can, and should, change the terms of
their pension plans to remove the early retirement enhancement
provisions. If that is done, the grow-in rules will not apply.
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located in the country's key business centres. We focus on
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of where you choose to do business in Canada, our strong team of
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and cross-border matters. FMC's well-earned reputation for
consistently delivering the highest quality legal services and
counsel to our clients is complemented by an ongoing commitment to
diversity and inclusion to broaden our insight and perspective on
our clients' needs. Visit:
www.fmc-law.com
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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DC Plan Issues (Presentation)
