It’s being heralded as the biggest development since registered retirement savings plans (RRSPs) were introduced in the 1950s. Announced unexpectedly in February’s federal budget, the Tax-Free Savings Account (TFSA) is already proving attractive, or at least intriguing, to employers.
The appeal is understandable — employees would be able to contribute up to $5,000 per year, with the contribution limit indexed to inflation, and unused contribution room carried forward without limitation. While there is no tax deduction for contributions made, investment income and withdrawals are tax-exempt. Money can be taken out at any time, and re-contributed, and withdrawals would not affect eligibility for government means-tested programs, such as the Child Tax Benefit or Old Age Security.
“This is a very sexy benefit,” said Alan Black, pension and benefits manager at Simon Fraser University in Vancouver. “At first blush, it looks good. We’ve had employees ask about it already.”
The university offers a group RRSP, a group life income fund, a registered retirement income fund and two pension plans but the TFSA would be a nice addition, he said.
“The government is giving us something for nothing and it’s indexed. I like it better than an RRSP,” he said.
That enthusiasm is mirrored in a recent survey by Morneau Sobeco, in which 40 per cent of 193 employers polled said it was “likely” or “definite” their organization would set up an employer-sponsored TFSA.
“The positive interest at this early stage is already very high,” said Greg Hurst, Morneau Sobeco’s national DC practice leader. “It is likely that interest in an employer-sponsored TFSA will rise further in the months ahead as more employers become comfortable with the concept and learn how TFSAs can be factored into their organization’s overall retirement and savings programs.”
A few years back, the C.D. Howe Institute proposed a similar offering for people ill-served by RRSPs or traditional pension plans, so William Robson, Toronto-based president, said he is delighted by the TFSA.
“I hope the proposal emerges in proper, legal language as clean as the budget presented. If it does, financial sponsors will get into the act, make an effort to get a foot in the door early, and for plan providers who have had trouble encouraging employees to save, there are some obvious attractions to this plan,” he said. “You want to do the right thing by employees and this plan will provide a very useful new option for doing that.”
The TFSA, with its immediate return, makes a lot of sense for a younger workforce, he said, while an RRSP can be a tougher sell.
“For the employer with a fairly young demographic that might have trouble with ordinary savings plans, getting people interested in contributing, this is a much more obvious fit,” said Robson.
There are also advantages for seniors and smaller employers, said Malcolm Hamilton, a Toronto-based consultant with the HR consulting firm Mercer. Contributions do not have to stop at age 71, as with an RRSP, which allows people to save for medical expenses later in life or build a nest egg to pass on to their children that “won’t be decimated by taxes,” he said. For smaller employers, the TFSA is easier to administer, doesn’t depend on income, doesn’t alter RRSP contributions and sets up nicely for matching.
“If introducing a plan today, the better decision for most companies is the TFSA alone, or both, if you have significant numbers of well-paid employees,” said Hamilton.
But there are a few hurdles to overcome. With an RRSP, individuals enjoy a deduction on what goes in but pay tax on what comes out; with a TFSA, there is no deduction on money going in but no tax on funds coming out.
“People need to be far-sighted enough to look not just at the money going in but also the money coming out. The mechanisms are different but the result is pretty much the same,” said Hamilton. “It’s a simple, flexible, very versatile savings investment that has virtually all the advantages of RRSPs and few of the disadvantages.”
But if an employer sets up a group TFSA, its contributions would be credited to employees as taxable income, unlike a group RRSP. That’s the main reason public relations firm Hill & Knowlton is not considering a group TFSA, said Ruth Clark, senior vice-president of HR at the Toronto office. However, the firm could set it up so employees send a portion of their pay to a TFSA.
“Clearly helping employees direct their money from their pay through that option will probably help a lot,” she said. “As financial institutions develop products around this, there’ll be opportunities for us to make it easier for employees, maybe from an education standpoint.”
And group RRSPs have similar issues, since employer contributions trigger additional Canada Pension Plan and employment insurance contributions for employees.
“In the absence of matching contributions, the TFSA should be as easy, if not easier, than the group RRSP,” said Hamilton. “The problem is how do you position it vis-à-vis your existing programs? The one downside of having both side by side is people have to decide and that’s not easy, they get confused.”
There are other questions. Robson says he is keen to see if the government will stick to its decision that the TFSA not affect claw backs of programs such as the guaranteed income supplement. And the success of the TFSA will depend on how the provinces treat the distributions and assets when it comes to income- or asset-tested programs, he said. If the provinces decide a certain amount of savings in a TFSA makes people ineligible for types of welfare programs, “then you’ve got a problem for a lot of people whom these plans might otherwise help,” he said.
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