If you are an American company looking to hire a Canadian employee, you should know that Canada does not have 401(k) plans. However an American 401(k) plan is very similar to a Canadian RRSP or Registered Retirement Savings Plan.
Often American companies will look to offer a Canadian employee an 401(k) equivalent to those workers they employ in the U.S. An RRSP is very similar but there are some key differences.
For a U.S. company hiring Canadian employees, it can be your benefits package that helps you stand out from other potential employers so it’s important to consider this as an option to retain top talent. Although a great perk for many Canadians, offering a retirement savings plan is not mandatory nor is matching a plan if the employee chooses to have one.
An American 401(k) Plan is Similar to a Canadian RRSP because:
Both plans were created and offered by their respective governments.
Both give employees in Canada and the United States, a tax deferred way to invest and grow their retirement fund.
Both plans have annual contribution limits.
Both enable investment into a diversified mix of investments such as mutual funds, bonds, stocks and GIC’s.
A Canadian Registered Retirement Savings Plan is Different from a 401(k) Plan because:
The Canadian RRSP account has no early withdrawal penalties unless, of course, you count being taxed a penalty. In the United States, an employee would be taxed a steep 10% for early withdrawal.
Unused RRSP contribution limits can be carried forward to the next year whereas a 401(k) plan has a use it or lose it policy.
Unlike the American equivalent to RRSP’s, Canada’s plan does not allow employees to “catch up” with higher contribution levels after the age of 50.
The contribution amount limit is different for each plan. In Canada, an employee’s annual contribution maximum is 18% of the previous year’s salary or a maximum of $20,000. The annual contribution limit in 2019 for an American 401(k) plan is $19,000 for everyone regardless of income. After the age of 50, American employees get an additional $6000 of contribution room bringing the contribution maximum to $25,000 for those over 50.
As you can see there are many similarities as well as differences in the American 401(k) plan compared to the Canadian Registered Retirement Savings Plan or ‘RRSP’.
Although the process of setting up an RRSP matching employee program is easier than implementing a 401(k) program it does not exclude the requirement of foreign based employers to have the various Canadian government accounts in place to process payroll deductions and remittances. Without a PEO or Employer of Record service in Canada, a U.S. or foreign company looking to pay a Canadian must register a business in Canada, apply for the various government accounts and then set up any benefit plans they want to offer their Canadian workforce.
The Payroll Edge is an Employer of Record service provider. We offer PEO services to American and foreign employers who want to hire Canadian employees.
The Payroll Edge is the Employer of Record for more than 40 companies based throughout North America and Europe. Allowing us to act as the employer of record for your Canadian workers allows you to hire without the worry of understanding and complying with a foreign set of rules and regulations.
Partnering with a Canadian employer of record allows you to remain in compliance with Canadian employment law and offers your Canadian workers excellent benefit package options including an RRSP employee matching program.
Contact us to learn more!