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As of January 1, 2009, any Canadian resident over the age of 18 will be able to contribute $5,000 a year to the new tax-free savings account or “TFSA”. To answer questions about the new TFSA and its impact on employers and employees when added to a group benefit program, we’ve turned to Mazen Shakeel, a senior retirement consultant in Hewitt’s Retirement and Financial Management practice. If you'd like to ask a question on adding TFSAs to your employee benefit plan, or any other pressing human resources challenges you might be facing, email us, and we'll share responses to selected questions on a regular basis.

Question: What is the difference between a TFSA and a RRSP?

Answer: This chart summarizes the main differences between a TFSA and a RRSP (Registered Retirement Savings Plan). In some ways, a TFSA is a mirror image of a RRSP: while the contribution to a TFSA is made with after-tax dollars, there is no tax paid on capital gains or investment income or when the funds are withdrawn. In the case of a RRSP, contributors receive a tax deduction at the time they deposit money, but the funds are taxed as income when withdrawn.

TFSA vs. RRSP

TFSA

RRSP

Minimum age for contributing	18	None
Maximum age for contributing	None	71
Requirement to file tax return	Yes	Yes
2009 contribution room	$5,000 in 2009	18% of 2008 income - 2008 PA + 2009 PAR - 2009 PSPA + unused room
Carry-forward of unused room	Yes	Yes
Penalty for over-contributing	1% per month	1% per month
Contributions to spouse's plan	Allowed	Not allowed (contributions to spousal plan allowed)
Tax deduction for contributions	No	Yes
Taxation on withdrawal	None	Taxed as income
Impact of withdrawals	Room restored	Room not restored
Subject to OAS clawback	No	Yes
Subject to income splitting	Not applicable	Yes
Deductibility of interest on borrowed funds	None	None

Question: Why would an organization choose to add a TFSA to its benefit program when individuals are able to set up their own TFSAs?

Answer: Canadian organizations have a tremendous opportunity to get creative and embed the TFSA into their retirement and benefit programs. Organizations that take a strategic approach to integrating the TFSA into their programs can differentiate themselves, demonstrate their innovation and commitment to employees, and re-engage employees in the company-sponsored financial security programs. Advantages include:

• More tax savings opportunities for employees
• Opportunity to meet the diverse savings needs of a multi-generational workforce
• Benefit that complements and supports other group programs

In today’s tight labour market, companies that offer a full range of benefits and retirement options to employees can gain a competitive advantage, while also providing more flexibility for their employees when it comes to saving for a variety of short- and long-term needs, including retirement.

Question: Why would employees find a TFSA to be an attractive addition to their company-sponsored plan?

Answer: Employees enjoy the convenience of saving through payroll deductions, gain access to institutional investment managers and funds with the benefit of employer oversight of plan managers and funds, and likely incur lower investment management fees in a group TFSA.

As well, employees will be able to use the TFSA as a temporary holding account for subsequent transfers to other registered plans (e.g., RRSP) as a way to maximize their tax benefit.

Question: What other considerations are there for organizations in determining whether to add a TFSA?

Answer: In most cases, adding a TFSA to the employee benefit program will be advantageous. However, before jumping to include a TFSA in the plan, organizations should consider whether doing so supports their business and HR objectives.

Assuming it does, the next step is to consider opportunities for integrating a group TFSA into existing company-sponsored programs. A key question is whether the objective is to encourage saving for retirement or general savings. If the goal is to help employees save more for their retirement, it may make sense to integrate the TFSA into a defined contribution plan; if the objective is general savings, then employers might offer a stand-alone TFSA or integrate it into their flexible benefits program.

In addition, employers should be aware of the investment and government implications of adding a TFSA. Moreover, there are communication issues as well as implementation considerations. However, organizations that think through the challenges and are creative in implementing their group TFSA have an opportunity to differentiate themselves.

We invite you to listen to our Webcast titled "Including TFSAs in Employee Benefit Programs - A Good Idea?" featuring our expert, Mazen Shakeel, a senior retirement consultant with Hewitt, along with Marie Donnelly, a senior consultant in Hewitt’s communication practice, and Ismo Heikkila of TE Wealth. These thought leaders examine the pros and cons of group TFSAs.

Click here to launch or download the replay of the Webcast.

To read our recent press release on employer plans for introducing the TFSA to their employee benefit programs, click here.

About Our Expert

Mazen Shakeel is a principal with over 18 years of consulting experience in Hewitt’s retirement consulting practice. Mazen leads Hewitt Canada’s Innovation Committee and is responsible for spearheading Hewitt’s efforts to bring new ideas to clients.

Mazen has worked extensively with organizations on the review and redesign of their defined contribution and defined benefit retirement programs. Mazen is one of Hewitt’s most experienced consultants in the benchmarking of the competitive position of retirement and benefits programs using Hewitt’s Benefit Index® methodology.

A Fellow of both the Canadian Institute of Actuaries and of the Society of Actuaries, Mazen has a Bachelor of Science degree in Statistics from the University of Toronto. He is a frequent speaker on retirement savings issues.