Many Canadian employees may soon have the option of contributing to a Tax Free Savings Account (TFSA) at their workplace, according to research conducted by Hewitt Associates, a global human resources services company.

Legislation that makes TFSAs available to Canadians as of January 1, 2009 received Royal Assent last week. Any Canadian resident over the age of 18 will initially be able to contribute $5,000 a year to this new savings vehicle. While the contribution is made with after-tax dollars, there is no tax paid on capital gains or investment income or when the funds are withdrawn.

“We polled over 250 employers at the beginning of June regarding their plans for introducing a group TFSA within their organizations,” says Mazen Shakeel, a senior retirement consultant with Hewitt. “Forty-three per cent indicated they were either likely or highly likely to add a TFSA to their employee benefits program. Another 45% were unsure, but hadn’t ruled out adding a TFSA.”

According to Shakeel, those who are likely to benefit the most from a TFSA include the following:

> individuals who will need access to funds before retirement;

> individuals with little/no RRSP contribution room

> fast-trackers — those expecting pay to increase faster than inflation; and

> people receiving income-tested benefits.

Employers participating in the Hewitt poll shared their primary reason for adding a TFSA. The majority — 40% — want to add another vehicle for tax-favoured retirement savings. Another 36% are interested in providing greater flexibility for employees. Eleven per cent believe adding a TFSA will assist with attracting and retaining employees, while the same percentage think that doing so will help them to maintain a competitive benefits program.

“The key question employers will need to consider before introducing a ‘group’ TFSA is whether they want to encourage and/or facilitate savings for retirement, or just general savings. The answer to this question may influence a company’s decision on whether to introduce a TFSA and, if so, how to integrate it into the organization’s retirement and benefits programs,” saYS Shakeel.

“The employers we surveyed identified two key challenges to introducing a TFSA: communication and administration. Will employees understand how and when to use a TFSA? Will the utilization rate justify implementation and ongoing costs?,” says Kim McMullen, a senior communications consultant at Hewitt. “The introduction of a flexible savings vehicle like a TFSA puts more focus on the level of support needed to help employees meet their financial goals. Companies will need to look closely at the level of communication and employee education they offer.”