The implications of TFSAs and phased retirement

Plan sponsors would do well to familiarize themselves with the new legislation regarding tax-free savings accounts (TFSA) and phased retirement, according to experts.

A Buck Consultants panel outlined on Wednesday the new rules pertaining to pensions and benefits, starting with the TFSA. “The TFSA may just be the next big thing in tax sheltered savings vehicles since the RRSP,” said Mariette Matos, Buck’s director of research and compliance. A marketplace for group TFSAs will be created, she explained, and the majority of financial institutions will have TFSAs available in January 2009.

Many employers are expected to add a group TFSA to their retirement/savings program, and to date the provinces of Alberta, Ontario and Quebec have all agreed to adopt the TFSA initiative once it is passed by the federal government. Matos expects the remaining provinces will also adopt the TFSA initiatives.

She explained that there are a number of potential HR applications for TFSAs. “For employers, if you currently have a stock plan, the TFSA seems like a very convenient solution to avoid paying capital gains taxes,” she said. “Depending on your company philosophy, you may want to stay ahead of the competition by offering a TFSA option to employees.”

Further potential applications exist for the TFSA, according to Matos, such as registered plan overflow accounts, funding of supplemental employee retirement plans (SERP) benefits, funding of post retirement non-pension benefits, phased retirement top up, and as an option in DC plans.

“The bottom line is, action is optional,” she said. “We feel you should be aware of this new savings vehicle and be prepared for questions from employees. Depending on your company philosophy, you may want to be an early adopter.”

Phased retirement is another aspect of the new budget relevant to the benefits and pension industry, according to David Blundell, a pension and benefits consultant with Buck. “Phased retirement may finally be getting the legislative framework required to allow sponsors to actually implement a phased retirement program that works with the pension plan,” he said. Companies that are downsizing or need to retain a group of workers thinking about retirement should consider phased retirement, Blundell added.

He explained that a review of HR policies and programs to determine how a flexible work environment fits within the corporate philosophy is a good idea, but before seriously considering implementing phased retirement into your pension plan, you will need to understand which employee classes are eligible. “Eligible employees are defined as plan members who have attained age 60 or, if they are entitled to an unreduced pension, age 55,” said Blundell. “The provisions are entirely voluntary so an employer does not have to provide for phased retirement under their pension plan.”

He added that employers may find a national phased retirement solution difficult to implement due to the possibility of different provincial rules, and cautioned that phased retirement will very likely have an associated cost to it, as employees that take this option will start to collect pension income earlier than without phased retirement.

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