Workers aren’t asking for it, so employers aren’t lining up to add it to benefit plans
Companies have been slow to incorporate the new tax free savings account (TFSA) into benefits plans because of limited employee support, according to Dan Morrison, Calgary-based senior consultant at consulting firm Watson Wyatt.
“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,” he says, citing one company that decided to offer a TFSA though the insurance company predicted it wouldn’t get more than 20 to 30 people to sign up for it.
The new savings plan was launched by the federal government on Jan. 1, 2009. It enables people to set aside up to $5,000 a year without accruing tax on the income it generates and gives them the flexibility to withdraw funds without penalty.
Questions employers should ask
If a company is considering offering a TFSA to employees, the first step is to evaluate how it fits into other benefits programs, says Morrison. Employers should consider if there is a genuine need for another savings vehicle.
“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?” he says.
“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 says.
If a company already provides a group registered retirement savings plan (RRSP) 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 says.
“It’s just more work to set one up if all you have is registered savings accounts,” he says. “It’s certainly easier if you have a non-registered after tax account.”
Another challenge to note, says Morrison, is the TFSA falls under the guidelines for capital accumulation plans. This means employers that 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 says.
Although establishing a TFSA for employees may be challenging in the beginning, it provides another way of retaining and attracting employees, says 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. I make myself a more attractive employer by providing another easy investment option to employees,’” says Robertson.
3 groups who would benefit from TFSA
Robertson outlines three groups who would benefit from putting their money into a TFSA. By using the account to save, they would “just take out the tax man,” he says.
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 says.
“The thought of retirement seems distant to them, so this has huge flexibility,” he says.
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 the low-income bracket who would like to avoid being taxed for RRSP withdrawals and are not receiving a significant tax deduction for RRSP contributions.
Morrison echoes the sentiment and says the TFSA provides an enticing alternative for people included in the lower income group because, unlike RRSP withdrawals, the TFSA does not reduce their eligibility for the guaranteed income supplement.
While the process of introducing TFSAs has been slow, it will grow in use, says Robertson.
It is difficult to compare it with the popularity of RRSPs, he says, because people have been “bombarded” with information about those plans for decades.
“This is a new vehicle and people are learning about it at a time when people are marginally scared of investing,” he says. “Once people get it, more and more (they) will be attracted to it.”
Angela Scappatura is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter that focuses on total rewards. For more information, visit www.hrreporter.com/ccbr.
TFSA VERSUS RRSP
How is a TFSA different than an RRSP?
The tax free savings account (TFSA) is a new way for Canadians to set money aside, tax-free, throughout their lifetimes. Some of the differences between a TFSA and a registered retirement savings plan (RRSP) are:
• Contributions to a TFSA are not tax-deductible.
• Withdrawals from a TFSA are not taxable and are added back to next year’s contribution room.
• With a TFSA, you don’t need earned income to accumulate contribution room.
• There is no age limit after which you can no longer contribute to a TFSA.
• You can provide money to your spouse or common-law partner so she can contribute to her TFSA.
You can contribute to a TFSA by transferring money directly from your RRSP. If you contribute to a TFSA using money from your RRSP, you will be subject to the applicable tax implications for withdrawing money from an RRSP.
Source: Canada Revenue Agency
TFSA Statistics
Less than one-half plan to open TFSA: Survey
While it’s still too early to measure the actual interest in tax free savings accounts (TFSAs), a survey conducted in the fall of 2008 showed the majority of Canadians do not plan to open an account.
Slightly less than one-half (46 per cent) of 2,100 Canadians surveyed by Harris/Decima on behalf of the Investors Group in September planned to open a TFSA when it became available in 2009 and about 17 per cent planned to contribute the maximum of $5,000.
Lack of knowledge was the predominant reason behind the reluctance to embrace TFSAs, while one in five said they simply didn’t have the cash to invest.
When asked what they would use the TFSA for, the majority (65 per cent) said retirement savings. Other prominent reasons included saving for a vacation, tuition and a down payment on a house.
TFSA RESPONSE
Age makes difference with popularity of TFSA: Surveys
The tax free savings account (TFSA) is most popular with Canadians 65 and older, according to a February survey of 1,502 people conducted by the Bank of Montreal. The survey finds one-third of people 65 and older have opened a TFSA, followed by one-quarter of those 55 to 64 and 15 per cent under the age of 45.
Another survey finds younger people (18 to 34) who plan to open a TFSA intend to use the account for general savings, emergencies or education. But Canadians aged 34 to 54 are more likely to see the TFSA as part of their retirement savings, according to 1,000 people polled by HSBC Bank Canada in February
Awareness of the TFSA is high: 79 per cent of Canadians are aware of the new savings plan, compared to 94 per cent who are aware of the RRSP and 84 per cent who are familiar with an RESP, according to a February survey by TNS Canadian Facts. And only 27 per cent say they are confused between a TFSA and an RRSP.
The survey also finds 14 per cent of Canadians have opened a TFSA and another 36 per cent are likely to do so in 2009. Some question the wisdom of introducing a TFSA during an economic downturn, as 47 per cent feel the government should encourage people to spend money to stimulate the economy, not encourage them to save money.
