Companies have been slow to incorporate the new Tax Free Savings Account (TFSA) into benefits plans because of limited employee support, said Dan Morrison, Calgary-based senior consultant at consulting firm Watson Wyatt.
“I was speaking to someone last week who just put one in and the insurance company who they went with had a bet that they wouldn’t get more than 20 to 30 people sign up for it,” he said. “Employers are not convinced there is a huge demand from employees right now for doing it so the case (for a TFSA) is a lot less.”
The new savings plan was implemented Jan. 1, 2009. It enables people to save money without accruing tax on the income it generates and allows them the flexibility of withdrawing funds without penalty.
If a company is considering offering a TFSA to employees, Morrison suggested first evaluating how it fits into other benefits programs. Employers should ask themselves if there is a genuine need for another savings vehicle, he said.
“One question employers need to look at is: Is this a supplement to their retirement savings program or is this a totally different savings program that allows more for short-term savings and will do it just to facilitate employees having extra savings?” he said. “They need to look at why they need to put it in, what benefit it is going to be for employees and do they want to take on the administration of another benefits program.”
The extra responsibility of administering the TFSA could pose a challenge for companies, he said.
If a company already provides registered savings plans such as group RRSPs or a defined contribution (DC) pension plan, it would need to set up a new set of accounts to accommodate the TFSA. Ultimately, the plan would cost the organization more money, he said.
“It’s just more work to set one up if all you have is registered savings accounts,” he said. “It’s certainly easier if you have a non-registered after tax account.”
Another challenge to note, said Morrison, is the TFSA falls under the guidelines for Capital Accumulation Plans (CAP). This means employers who offer it are obligated to set up a communications strategy to educate employees so they have enough information to make investment decisions.
“There are obligations for them to treat it like an RRSP or a DC plan and would they want to take on that extra responsibility?” he said.
Although establishing a TFSA for employees may be challenging in the beginning, it provides a another way of retaining and attracting employees, said Rick Robertson, associate professor at the Richard Ivey School of Business in London, Ont.
“I think the attraction is simply, ‘here is one more benefit I could apply to my employees they may want to take advantage of,” he said. “(They say) ‘I make myself a more attractive employer by providing another easy investment option to employees.’”
Robertson outlined three groups that would benefit from putting their money into a TFSA. By using the account to save, they would “just take out the tax man,” he said.
First, young people who are saving for big purchases such as a home or a vehicle can benefit because the money they withdraw is not taxed and they can redeposit the amount later on, he said.
“The thought of retirement seems distant to them, so this has huge flexibility,” he added.
Second, older individuals approaching retirement who have already “tapped out” their RRSP contributions may use the account as a vehicle to save more money.
The third group is comprised of people in a low income bracket who are not receiving a significant tax deduction for RRSP contributions.
Morrison echoed the sentiment and said the TFSA provides an enticing alternative for people included in the lower income group because, unlike RRSP withdrawals, it does not reduce their eligibility for the guaranteed income supplement.
While the process of introducing TFSAs has been slow, Robertson is convinced it will grow in use.
It is difficult to compare it with the popularity of RRSPs, he said, because people have been “bombarded” with information about it for decades.
“This is a new vehicle and people are learning about it at a time when people are marginally scared of investing,” he said. “Once people get it, more and more (they) will be attracted to it.”
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