Is HOOPP the pension Nirvana physicians have been waiting for?
With great fanfare, the Ontario medical community was notified that effective January 2, 2025, if they receive T4 income from their medical professional corporation, they were now eligible to join the Healthcare of Ontario Pension Plan also better known by its acronym, HOOPP.
On the surface, this is wonderful news for Ontario incorporated physicians who have been asking for decades to be treated with dignity when it comes to retirement savings and were never offered as chance to participate in a true defined benefit (DB) pension plan until recently.
The HOOPP advantages
For one thing, because HOOPP is a multi-employer pension plan (i.e., many different employers like hospitals, community health centres and now Medical Professional Corporations (“MPC”) band together), it can centralize money management by the professional money managers of the HOOPP team. This means participating physicians do not have to play any role in investment decisions relating to the contributions made by their MPC.
HOOPP is arguably one of the best defined benefit pension plans in all of Canada. Its investment record speaks for itself as it has been beating its investment benchmark for over 20 years and has developed a healthy pension surplus. The administrative staff at HOOPP are ‘top tier.’ The likelihood that there won’t be enough money to pay the fixed, promised benefit pension of a retiring physician appears very remote. For that alone, we should welcome HOOPP to the growing family of pension providers that wish to help physicians prepare their retirement.
Since HOOPP was created in 1960—and Ontario physicians were given the right to incorporate via MPCs (and thus eligible to join HOOPP) in the early 2000s—the question is, why is HOOPP only opening its doors to fellow healthcare providers now in 2025?
The HOOPP drawbacks
While HOOPP promises a fixed defined benefit pension in retirement that is based on a formula, unlike single employer pension plans such as Individual Pension Plans (IPP) or Personal Pension Plans (PPP), the mechanism it uses to fund the promised benefits is more similar to a defined contribution (DC) plan (in that the contributions are fixed by HOOPP at a certain percentage of salary regardless of the age of the physician). The cash that must be contributed each year to HOOPP is made up of employee (ie. the physician) contributions and employer (i.e. MPC) contributions. The combined contribution rate works out to 20.5% which is nominally higher than what is allowed under an RRSP to a physician. If maximizing tax deductions (the most powerful method to keep the most of what one earns), via enhanced contributions to a pension plan, is a key objective, HOOPP’s contributions/deductions are not much higher than those available under an RRSP. By contrast, the MPC of a physician contributing to an IPP/PPP would contribute well above 20.5% by using a number of CRA-approved tax rules such as “special payments,” “terminal funding” and “higher annual contributions based on age.” For example, a 64-year-old physician in an IPP/PPP can contribute 29.5% of T4 income.
Bottom-line, it is not up for debate that the MPC can contribute multiple times what it can contribute to HOOPP if it sponsors either an IPP or a PPP, resulting in a significantly lower tax bill (and thus faster path to reducing financial stress and achieving financial security).
While controlling tax is one objective, most physicians should aim to achieve on their road to financial independence, perhaps the most significant ‘Achilles’ Heel’ of the HOOPP solution is experienced in the event of a physician's death (before they've been able to reap the literal benefits of the pension payout).
The actuarial gain HOOPP problem
Many physicians have children and cherish them, hoping to help them in future years. Many of these children will have children of their own. Most would like to leave a legacy from their pension plan to them should they pass away without a spouse (or upon the death of the surviving spouse).
Under the terms of the HOOPP plan, a retired physician is entitled to a pension for the remainder of that physician’s natural life. In the event of death of the HOOPP retiree, at any age, and at any point in the retirement, an eligible spouse is entitled to a continuation of the monthly retirement payments thanks to what we call a Joint & Survivor Pension. That type of pension is payable for the remainder of the natural life of the surviving spouse. In instances where both the physician and spouse have long lives, there is absolutely nothing wrong with this type of plan design.
The real problem arises when death occurs prematurely (whether of natural causes or due to accident etc.). HOOPP has a “guarantee period” of five years from the day the physician becomes a retiree. The guarantee period means that if both the physician and spouse pass away within the first 60 months, the remaining payments (up to 60 months) will be continued to the designated beneficiaries of the physician, which are normally the children.
Once those payments are made there are no further payments owing to family members. Perhaps even more worrisome is the situation where both spouses pass away after the five-year guarantee period has passed. In such a case, there are no payments owed to family members (i.e. the designated beneficiaries) at all.
In actuarial parlance, the millions of dollars that the MPC and physician had contributed to the central pension fund of HOOPP is now an ‘actuarial gain’ to the pension fund. In layman’s terms, that simply means that family/estate gets nothing of the large sums of money that would have been used to pay a pension over many decades of retirement. The family of the deceased is, in effect, giving the pension dollars to the other retirees of HOOPP. This is one of the trade-offs the future retiree makes to gain the security of a defined benefit, and is an essential risk-pooling mechanism by which HOOPP maintains its financial stability over the long term.
One might take the position that a physician who has no children might not care about the ‘actuarial gain’ problem described here. One should point out that under an IPP/PPP if there are millions of dollars of surplus left over once both the physician and spouse have passed on, those resources could be donated to a charity, hospital, university or some other family member.
IPP/PPP and the actuarial gain (non) issue
What are the applicable rules if the physician opted for an IPP or PPP instead of HOOPP?
If the physician and spouse die early or late in one of these plans what happens to all of the millions of dollars of pension money? Under the terms of these plans, the MPC or employee is named as the ‘owner’ of any surplus assets left in the fund when the pension promise has been fully fulfilled. That means that this pension surplus can be distributed to the designated beneficiaries in a lump sum where it will be taxed in the hands of the recipients. If the beneficiary is tax-exempt (e.g. charity, hospital, university etc.) there is no taxation at all.
In some cases, where physicians have family members on the payroll of their MPC they can offer membership to their family employees within the IPP/PPP. Should a surplus arise in the event of the physician (and surviving spouse if any), none of that capital would be subject to taxation and would continue to grow in the tax-sheltered pension plan for many years into the future. Taxation would only occur when the second generation decides to retire or pull out surplus sums for spending purposes before retirement.
The wealth that the IPP/PPP preserves for the next generation can also pass down to a subsequent generation if the descendants of the second generation end up being employed by the ‘family’ corporation (the MPC converted into a holding corporation) and thus subsequently added to the family pension plan.
Regulatory differences
HOOPP is regulated by the Pension Benefits Act of Ontario (“PBA”) and the Financial Services Regulatory Authority. The PBA is comprehensive legislation that imposes a number of rules that don’t apply to IPPs/PPPs set up for ‘connected persons’ such as physicians owning their MPCs. For some physicians, the PBA rules may be seen as an irritant or at the very least fettering their freedom of action when it comes to the physician’s retirement assets. For example, annual contributions to HOOPP are mandatory and failure to remit could even trigger administrative penalties or fines. Under an IPP/PPP, contributions are 100% voluntary in nature. Also, mandatory contributions made to HOOPP (the 20.5% of salary each year) and the growth thereupon, are “locked-in” by the PBA, meaning that they are no longer accessible to the physician unless certain very strict conditions are met. One way to ‘unlock’ pension money is to provide evidence that one will die within two years due to a health condition. Another, is for a physician who becomes a non-resident of Canada for two years or more. Again, given that the PBA does not apply to an IPP or PPP, cash contributed to such solutions is never locked-in and can be accessed by the doctor.
How do you get out?
Like most sophisticated professionals, physicians usually prefer control over their own affairs and might ask what mechanisms are in place if they ultimately decide to leave HOOPP once they’ve joined it.
The PBA does provide HOOPP members with ‘portability rights’ namely the ability to ask for the commuted value (their lump sum entitlement within the entire plan) to be transferred to Locked In Retirement Account (LIRA) or Life Income Fund (LIF) or even to purchase an annuity, but given HOOPP’s exceptional returns, this would normally also trigger an immediate tax consequence for the departing physician. This is what pension experts refer to as the ‘maximum transfer value’ issue as found in Income Tax Regulations 8517. A quick illustration brings this concept to life:
- Imagine that the commuted value of the departing physician is $1,896,342 and that the physician is aged 71 at the time they elect to have the commuted value transferred to a LIF.
- Under Income Tax Regulation 8517, $285,779 of the $1,896,342 is the ‘excess amount’ above the amount capable of rolling into the LIF without tax (namely $1,610,563 goes into the LIF).
- If the physician is in the highest tax bracket—the marginal tax payable that year would be $152,891. That is a lot of unnecessary taxes being paid when one could have used an IPP or PPP instead where this regulation does not kick in.
Conclusions
Physicians who want to maximize their tax deductions, maximize their retirement income, reduce financial stress, and increase financial security, while controlling their assets and making sure any surplus goes to their loved ones should recognize these HOOPP limitations and restrictions, do their due diligence and consider alternative pension plans truly designed for physicians currently in the market instead of joining HOOPP.
HOOPP should be commended for finally allowing physicians to secure a solid pension for themselves. But, as with anything else, the ‘devil is in the details’ and before being lured by a new ‘shining toy’ physicians need to do some due diligence on what the industry offers. Their financial future and the welfare of their children depends on it.
Dr. Vu Kiet Tran is an experienced physician hoping to banish the taboo of openly discussing financial security and wellness. He's the founder and host of the “How is my financial health, doc?" podcast.
The view expressed in this blog are entirely those of its author and do not necessarily reflect the views of the Medical Post.