In its last budget, the federal government introduced the tax-free savings account (TFSA), a completely new tax-sheltered investment vehicle. Although presented more in the context of an individual product, it is expected that most administration providers of capital accumulation plans will rapidly add a group TFSA to their product line-up in 2009.
Why should you care?
The TFSA has important implications for sponsors of retirement and savings programs. Even if the TFSA will fall under the radar for a large majority of employees at first, some will rapidly expect a group TFSA to be added to existing programs. A simple, one-plan arrangement such as a defined contribution (DC) pension plan may then morph into a combination DC/TFSA program. The same would go for a group RRSP/DPSP combination, which would include an extra layer with a group TFSA.
Note also that many defined benefit (DB) pension plan sponsors who had never thought they would be managing savings plans may well start doing so. This is due to the fact that the TFSA provides additional room for retirement savings—a characteristic likely to be noticed by members of “generous” DB plans (i.e., those with large pension adjustments, thus leaving little RRSP contribution room), like most found in the public sector.
Whatever the current arrangement in place, the sponsor will need to assess how to best structure the new combined program, including how to manage the flow of contributions. For instance, it may be desirable that overflow contributions (those that exceed the Canada Revenue Agency’s maximum) now go first to a group TFSA instead of a regular, non-registered savings plan. Sponsors adding a TFSA will also need to ensure contributions or overflows can be handled by their payroll department or provider. Expect that where a non-registered plan exists, many employees will want to transfer non-registered savings to the new TFSA annually to tax shelter their savings.
It will also be interesting to see if some employers will consider using the TFSA in part or in whole instead of SERPs (which, however, would have fiscal implications for the employer). Employers sponsoring a flexible benefits plan will also want to consider adding contributing to a TFSA as an option for unused credits, particularly for high-income earners.
Contrary to pension plan or DPSP contributions, employer contributions to a TFSA are considered as regular salary, and are thereby subject to normal payroll taxes. As the TFSA represents a particularly interesting proposition for low-income earners, switching to it may then increase the costs to the employer, as payroll taxes are at their highest for low-income earners. Employee contributions will also be more “costly” to employees, as they will not benefit from an immediate income-tax refund and will need to cover income taxes for any employer contributions.
In the context of the CAP Guidelines, the sponsor will need to integrate the TFSA as part of its governance structure, including selecting investment options made available to plan members, as well as the default investment option. The rapidity and ability with which the program’s current record keeper makes group TFSAs available may become a factor in deciding to revisit that provider’s selection and could represent an opportunity to take a fresh look at what other providers offer.
As with any change in benefits plans, a communication and education strategy will need to be implemented, particularly as the TFSA is a brand new concept. For instance, low-income earners will warrant particular attention to help them realize the long-term benefits of contributing to this new plan instead of a group RRSP.
Are you on the ball?
As shown above, adding a group TFSA to your retirement and savings program represents more than just offering another option. It may represent a completely new approach in your benefits thinking—possibly meaning important strategic shifts from an human resources perspective. Even though the TFSA will see the light only in 2009, the first steps towards understanding all its potential and implications should be taken now. As one of my clients recently put it: “I want to be prepared when I’m asked what we should do about this.”