At the start of every new year, many employees resolve to improve their fitness — emotionally, financially and/or physically. One pretty easy way that employers can help workers shape up (financially) this year is by offering a workplace tax-free savings account.
A knowledge gap still needs to be filled when it comes to TFSAs — and financial literacy in general — according to a recent survey by the Bank of Montreal. A sizeable number of surveyed Canadians said they’re in the dark about several financial issues, such as the difference between registered retirement savings plans and TFSAs. Additionally, the amounts that have been contributed to TFSAs fall far short of the maximum permitted under tax rules. It’s clear that many Canadians aren’t taking advantage of the financial opportunities provided by TFSAs, which is unfortunate as the accounts can be a valuable tool to build financial security.
While employers can help their employees by making TFSAs available via workplace retirement and savings programs, a 2021 Sun Life Financial Inc. survey on workplace capital accumulation plans in Canada shows there’s room for improvement. The report found, while many large employers are increasingly offering TFSAs, smaller employers are lagging behind on providing this option. The report concluded that “it’s clear that TFSAs are underutilized in group plans.”
Financial pressures wrought by the ongoing coronavirus pandemic continue, making the flexible withdrawal rules for TFSAs even more attractive now than they’ve been in the past. Many Canadians will likely be reminded of the need to consider their retirement savings security, as the financial services industry will surely be launching education campaigns to remind the public about the March 1 deadline for 2021 RRSP contributions.
The key reason employers should take a serious look at group TFSAs is that they’ve been available for more than a decade now and, in my opinion, no other type of savings plan in Canada offers the employee-friendly features they provide. The top three features for workers include:
1. All investment earnings on assets in a TFSA will be forever tax-sheltered. That’s a significant difference from the tax treatment of RRSPs, where tax will eventually have to be paid on investment growth when money is withdrawn. It’s so significant that it’s worth repeating: All investment gains, such as interest, capital gains and dividends will never be taxed, even when assets are withdrawn from a TFSA.
2. Tax-free withdrawals can be made from a TFSA at any time. That aligns with the fact that no deductions are available when contributing to this type of savings plan. Money contributed to a TFSA has already been taxed. This is another significant difference between RRSPs and TFSAs.
3. There’s an annual maximum amount that can be contributed to a TFSA, but any unused contribution room rolls over to future years. Amounts withdrawn generate new contribution room for the following year. Canadians who have never contributed to a TFSA are eligible to contribute up to $81,500 in 2022 (provided they were at least 18 years old in 2009, when TFSAs were first made available).
Employers may not be inclined to add a new type of savings plan to their benefits package if they perceive burdensome legal risks and administrative headaches associated with doing so. That perception may not be accurate if an employer already offers a group RRSP, as the additional burden of a group TFSA doesn’t significantly change what the employer is already dealing with. Service providers are usually willing and able to add group TFSAs without significant effort required by employers.
Employee communications, plan design terms and service provider contract terms will have to be dealt with by employers at the outset of a TFSA program’s launch. However, once those initial tasks are handled, the ongoing employer obligations of monitoring the service provider that provides the group TFSA are essentially no different for group TFSAs than for group RRSPs.
Industry standards and guidelines set out the specifics of what employers should do regarding group RRSPs and group TFSAs; they are far less onerous than the legal obligations of employers that administer registered pension plans. Employers that offer their employees CAPs such as group RRSPs and group TFSAs should: be prudent in selecting a service provider; ensure appropriate fees are charged and disclosed by the service provider; make an appropriate range of investment funds available; ensure the service provider is providing regular and accurate reporting; and monitor what the service provider is communicating to plan members.
The legal obligations regarding workplace CAPs aren’t new nor daunting and they shouldn’t deter employers that already have a group RRSP in place from seriously considering adding a group TFSA to their retirement and savings program. Given the benefits, employers should resolve to offer a workplace TFSA to workers this year as it’s a relatively simple way to empower employees to improve their financial fitness in 2022 and beyond.