The Healthcare of Ontario Pension Plan (“HOOPP”) recently announced that Ontario incorporated physicians will be eligible to participate in its defined benefit pension plan, effective January 2025. This would include physicians who run their own practices, provide services from a medical clinic or provide services from a hospital. Eligible self-employed physicians in Ontario who are incorporated under, and receive employment earnings from a Medicine Professional Corporation (“MPC”), will have the option of joining HOOPP. The MPC would become a HOOPP employer and the incorporated physician and other employees who work for the MPC would be eligible to join the Plan. At the end of 2023, HOOPP net assets were $112.6B with over 670 participating employers and 460,000 active, deferred and retired members.
For the estimated 24,000 physicians in Ontario that are incorporated, the opportunity to join a large and stable defined benefit plan to assist with their retirement strategy – and potentially support the recruitment and retention of their staff – represents a compelling opportunity. This publication reviews some of the potential benefits and considerations for Ontario incorporated physicians who are now eligible to join HOOPP.
Overview
Eligibility
Incorporated physicians who practice in Ontario under an MPC are eligible to join HOOPP if they draw employment earnings from their MPC in the form of a salary, provided their MPC is already – or will become – a member of the Ontario Hospital Association (“OHA”). If an incorporated physician joins HOOPP, their MPC becomes a HOOPP employer and they are eligible to become a member of the Plan as an employee of that corporation.
Pension calculations
The summary provided by HOOPP states that the lifetime retirement income received is based on a formula that takes into account earnings, the number of years of contributions to the Plan, and the age at which the pension starts. Members can choose to retire as early as age 55 or delay the start of their pension up until age 71. Additional features such as inflation protection in retirement, survivor benefits and disability benefits are also available.
Specifically, the pension calculations are based on the following:
• Average annualized earnings (measured over the best five consecutive years).
• Years contributed to the Plan (contributory service).
• The average year’s Maximum Pensionable Earnings (“YMPE”).1
For each year of contributory service, participants would receive 1.5 per cent of their average annualized earnings up to the average YMPE, plus 2 per cent of their average annualized earnings above the average YMPE.
Both the member and employer make contributions to the pension plan, based on the physician’s earnings and the Plan’s contribution rates (currently, 6.9 per cent on annualized earnings up to the YMPE and 9.2 per cent on annualized earnings above the YMPE). The employer (MPC) contributes 126 per cent of all member contributions.2
Employees
If the physician has employees under their MPC, or another healthcare organization that they or their MPC owns, the employees are also eligible to join HOOPP. Notably, although existing employees and new part-time employees can choose to join at any time during their employment, all new full-time employees of the MPC hired after it joins HOOPP must join the pension plan. However, family members of incorporated physicians are not eligible to join HOOPP unless they are also physician owners of the MPC.
Past service
Members can buy back all, or a portion, of their service at any time before they retire or terminate their membership in the Plan. Inmost cases, eligible past service can be paid with cash or by transferring funds from a registered account, such as an RRSP. The cost of buying back service depends on a number of factors, including age, earnings and years in the plan.
Notably, physicians can even purchase pre-membership periods of past service if they previously received employment (T4) earnings from their MPC, which would allow additional contributory and eligibility service in the Plan, thereby increasing their overall pension at retirement.
Advantages
1. Secure and predictable retirement income
HOOPP is a Defined Benefit Pension Plan which can provide a stable monthly pension for life while reducing longevity and investment risk for a portion of the physician’s retirement plan. The cost of living adjustments offered provide inflation protection in retirement, and the survivor benefits at death and disability benefits provide protection against life events.
2. Employee participation
The ability to include other (non-family) employees of the MPC can provide a competitive hiring advantage and allow the MPC to attract and retain talent.
3. Tax benefits
Both the employer and employee contributions to the pension are tax deductible, which reduces corporate and personal taxes respectively. In addition, the HOOPP pension payments are eligible for (pension) income splitting in retirement for married or common law couples. In contrast to a retirement pension, the alternative of building a retirement fund with the investment assets accumulating from retained earnings within an MPC exposes the investment income to annual corporate taxation (including the potential “clawback” of the small business deduction where investment income exceeds $50,000 annually), and personal/corporate taxation upon withdrawal, which could be negatively impacted by inefficiencies and/or changes in the tax “integration” system involving private corporations (such as the proposed increase in the capital gains inclusion rate).
Disadvantages
1. Loss of flexibility
Contributions can only be made based on the actual employment (T4) earnings that the physician draws from their MPC. The requirement for physicians to pay themselves a salary may result in a loss of remuneration flexibility.
Although the defined benefit HOOPP pension provides certainty in retirement income, others may prefer the flexibility and control over their investment allocation and performance, and the ability to access these funds at any time without possible restrictions on commutation or transfer, should life circumstances change.
Participation in HOOPP will result in a pension adjustment to the physician/employee which decreases their ability to contribute to an RRSP as an alternate source of retirement income.
2. Additional costs
There are two types of contributions required to the pension plan; employee and employer portions. The cost of employee contributions is borne by the employees (including the physician) and the second cost is borne by their MPC as employer contributions. As noted above, existing employees of the MPC have the option of joining HOOPP, however, following the HOOPP participation date, all newfull-time employees must join HOOPP upon hire. To the extent that the MPC is not already a member, fees from the mandatory membership in the OHA could represent an additional cost.
3. Impact at death
Although the HOOPP pension can provide a survivor benefit at death, the alternative of accumulating funds within the MPC (or establishing an Individual Pension Plan) ensures that the retirement funds (i.e., contributions plus investment growth) will be available for the family/beneficiaries in the event of the untimely death of the physician. Accordingly, for those concerned about an untimely death or shortened life expectancy, participation in HOOPP could be considered as one component to complement a physician’s current retirement plan by supplementing other strategies, including the accumulation of funds within the MPC or RRSP/TFSAs.
Other Considerations
Ultimately, the decision of whether or not to join HOOPP will be unique to each incorporated physician and will depend on their particular situation, taking into account:
• Current age and anticipated retirement date.
• Assumptions around life expectancy, rates of returns, corporate and personal tax rates.
• Existing retirement plans (e.g., RRSP, TFSA, Individual Pension Plan), MPC corporate investments.
• Historic and future payment of salary/T4 income from the MPC.
• Impact of death/existing estate assets (e.g., life insurance).
• Number of current/future employees in MPC.
Based on the above, participation in HOOPP may be particularly attractive to younger (incorporated) physicians who are just starting their careers. Physicians who require much of their annual professional income to fund their personal/family needs, those who have limited retirement assets and those who do not currently have a defined retirement strategy could also benefit from participation in HOOPP. However, even older, more established physicians may benefit from the secure and predictable income stream of a defined benefit pension to provide another component of their retirement plan, particular those with a history or preference for salary draws from their MPC.
Ultimately, consultation with your financial and tax advisors will be necessary to review the considerations of joining HOOPP in your particular scenario, in conjunction with your current retirement strategy. A significant consideration will be a comparison of the expected returns from investing your professional retained earnings corporately versus the potential pension entitlements under HOOPP, which will depend on the various assumptions around life expectancy, rates of returns, tax rates, etc. as part of a financial modelling exercise. For more information on the HOOPP opportunity for incorporated physicians, please see HOOPP: A Guide for Incorporated Physicians (ceros.com)
Individual Pension Plans
Many incorporated physicians have implemented an Individual Pension Plan (“IPP”) in their MPC to achieve similar benefits offered by HOOPP, including the secure and predictable retirement income of a defined benefit pension plan. An IPP can also offer other benefits and flexibility, including:
• The ability to include other non-physician family member employees.
• Potentially higher contributions and flexibility (frequency, optional contributions in uncertain economic times or cashflow scenarios, carryforward of unused contribution room, additional funding opportunities for underperformance, past service and terminal funding).
• Investment flexibility and control.
• Retention of pension surplus.
• Wind-up and termination flexibility.
• Access to residual pension assets on death.
Although IPPs may entail higher administration and associated costs, they continue to offer physicians a viable alternative tax and retirement planning strategy. For more information on IPPs, refer to Secure your retirement with an Individual Pension Plan: A smart choice for business owners and consult with your tax advisor.
Conclusion
The opportunity for Ontario incorporated physicians – and their employees – to join the HOOPP defined benefit pension plan represents a very compelling opportunity to bolster their retirement strategy. Much will depend on the physician’s current retirement plan, accumulated retirement assets, age and anticipated retirement date, in light of the potential benefits and considerations outlined herein.
For further information, please contact your BMO Private Wealth professional.
1The YMPE is an amount set each year by the Federal government based on the average wage in Canada (currently, $71,300). It is used in determining required contributions to the HOOPP.
2Based on these contribution rates, for a physician who is the only employee of their MPC and draws a salary of $150,000, the annual contributions to HOOPP would total $27,482, comprised of $12,160 (employee) and $15,322 (employer).
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
