Last updated: January 14, 2025
Introduction
Defined Benefit Pension Plans (#DB plans) are considered the gold standard for employee #retirement plans. They provide the member with the knowledge that they will receive a known, guaranteed income stream in retirement that may increase with inflation, without the risk of market fluctuations or longevity. For employers, these plans can result in material future financial risk, which is why we now see very few DB plans established outside of the public sector.
For many years, #Physicians have wanted a #pension program that would provide these #benefits, with the hope that the risk would be back-stopped by the Government, rather than their own professional corporations.
HOOPP
The Healthcare of Ontario Pension Plan (#HOOPP), a multi-employer DB plan, recently announced that it would permit Incorporated Physicians and their employees to participate in the plan, effective January 1st, 2025. Historically, HOOPP membership was restricted to employees of approximately 650 participating hospitals and was not accessible to Incorporated Physicians.
In joining HOOPP, Medical Professional Corporations (#MPC), including the incorporated Physician and/or their employees, can participate in the HOOPP DB plan. The Physician and if applicable, the employees, would make personal tax-deductible contributions, currently in the amount of 6.9% of salary up to the YMPE and 9.2% on the portion of salary above the YMPE up to the maximum earnings threshold, with the MPC making and employer contribution of 126% of the employee contributions.
Although the security of a future defined benefit is provided through HOOPP, there are remaining financial risks to Physicians participating in HOOPP, including:
There is a further financial risk in the event the MPC subsequently decides to exit HOOPP: The value provided to the members on termination could be substantially less than the contributions plus interest made (ie: the sum of their personal contributions plus the employer contributions made by the MPC) on the members behalf.
The Individual Pension Plan (IPP)
Another option available to Physicians to provide themselves a DB plan tailored to their needs, continues to be the Individual Pension Plan (#IPP). The IPP, which has served Physicians for decades, can provide a defined benefit like the HOOPP plan. It is funded entirely with pre-tax contributions from the MPC. Investment decisions for the pension fund are made by the Physician, or at their instruction, their financial advisor. In the event of future shortfalls in the assets relative to the liabilities, the Physician has full flexibility for deciding how much, if any, of the funding shortfall to top up, providing much greater cashflow control for the MPC.
With an IPP, the Physician also has greater flexibility and control with retirement options than with HOOPP. Although HOOPP provides certainty of lifetime income to the Physician without the requirement for further contributions after retirement, the IPP provides alternative advantages as follows:
Costs
There are actuarial and administration fees associated with establishing and maintaining an IPP that are paid directly by the MPC and are tax deductible to it. For HOOPP, there are also actuarial and administration fees, but these are reflected in the contribution requirements and not invoiced separately. There are additional HOOPP fees for an MPC however if the Physician had not been a member of the Ontario Hospital Association (OHA). To participate in HOOPP, these Physicians would be required to become members of OHA, which we understand from some Physicians, can vary in cost, but often costs roughly $1,300 annually.
DB Options for Employees
One trade-off of the IPP however, is that it focuses on the pension to the physician and sometimes their spouse. While it is possible for an IPP to be established for non-connected employees who work for the MPC, it would create the substantial financial risk that arise with typical DB plans. If the physician is looking to provide a DB benefit to the employees of their MPC in addition to themselves, they may want to consider another option such as the HOOPP or DB-Plus. In the latter program, the non-connected employees could be signed up without requiring the Physician to also be a member, leaving the Physician able to establish the much more financially flexible IPP for themselves.
Conclusion
In our experience working with Physician clients over the last 30 years, the corporate tax planning opportunity that the IPP provides is often what is of most interest, along with funding flexibility in times of business or economic uncertainty. With legislative easing on IPP funding rules stating that deficits and annual contributions are no longer required, this increased flexibility for Physicians has become a major motivator in their decision.
Considering the above, GBL’s position is that the IPP continues to offer the most financially flexible DB option for Physicians which also offers the highest benefit formula allowable in Canada – the 2% Defined Benefit.
Contact us if you have questions or would like to explore the setup of an IPP for your MPC through a complementary illustration.
Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners, and corporate pension administration across Canada. With offices in Calgary and Toronto, we have served 7,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs, RCAs, and SERPs. We have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at [email protected] or 403.249.1820 and follow us on LinkedIn to learn how we can help Build Your Future. www.gblinc.ca
