More than half of Canadians over the age of 50 don’t have a retirement savings plan. Why don’t more employees save? Perhaps they don’t see the benefit. Maybe they feel retirement is too far down the line. Or maybe they feel they can’t afford it.
How can your business help buck the trend? An employer contribution match is one of the best perks going in the workforce. It not only helps your company attract and retain top talent—it’s literally free money for the employee, with compound returns sweetening the pot.
By offering an employer match on your sponsored Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), you can help employees at all career stages to save for retirement.
Employer matches: How they work
With an employer matching contribution, some or all of an employee’s RRSP contribution will be “matched” by the employer. Some of the more prevalent matching formulas include:
Dollar for dollar
Dianne works at Widgets Inc., whose payroll is operated on a semi-monthly basis—two times a month, or 24 pay periods a year.
At a 4% contribution rate, Dianne is maximizing Widgets Inc.’s employer contribution amount. If she reduces her contribution to 3%, her employer’s match would also drop to 3%; but if she boosts her contribution to 6%, her employer would still only contribute 4%.
Partial (simple) match
Let’s take the same scenario as above, but Widgets Inc.’s retirement plan matches 50% on the first 6% of compensation deferred—or half of RSP contributions. If Dianne contributes $80 to the retirement plan, Widgets Inc. will add $40 as the match.
Tiered match/years of service
You can automatically increase your matching contribution based on the number of years an employee was worked for you. The tiers for years of service are configurable based on how you want to set them up. Here’s an example:
Years of Service |
Employer Match Tier |
1-3 years |
2% |
3-6 years |
4% |
6 or more years |
8% |
Using the example above, Dianne—with a 4% contribution rate and 2.5 years of service—is maximizing Widgets Inc.’s employer contribution amount of 2%. Once Dianne satisfies the 3 years of service, she will be contributing 4% and will automatically receive the new contribution matching tier of 4%.
The plan’s matching formula is chosen by the company and specified in the plan document—or it may be defined as discretionary, in which case the employer may determine not only whether or not to make a matching contribution in any given year, but also what formula to use.
What are the limits?
Registered Retirement Savings Plan (RRSP)
The CRA limits annual Registered Retirement Savings Plan (RRSP) contributions, and these limits change from year to year. For 2020, contributions are limited to the lesser of the two following items; 18% of your earned income in the previous year (2019) not to exceed the annual RRSP contribution limit (for 2019, the annual limit is $26,500). Employer contributions DO count towards these contribution limits. Further, any unused deduction room at the end of the preceding year can be carried forward and increase your RRSP deduction limit for the current year.
Tax-Free Savings Account (TFSA)
The CRA limits annual Tax-Free Savings Accounts contributions, and these limits change from year to year. Starting in 2009, TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. Employer contributions DO count towards these contribution limits.
- The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
- The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
- The annual TFSA dollar limit for the year 2015 was $10,000.
- The annual TFSA dollar limit for the years 2016 to 2018 was $5,500.
- The annual TFSA dollar limit for the year 2019 is $6,000.
How your TFSA contribution room is determined
The TFSA contribution room is made up of the total of all of the following:
- your TFSA dollar limit
- any unused TFSA contribution room from previous years
- any withdrawals made from the TFSA in the previous year
The total contributions into the plan must remain within the maximum limit defined within the Canadian Tax Act. This is for both the RRSP and the TFSA. An employee’s available contribution room can be found on their My Account and MyCRA on the CRA website. The information is shown as of the beginning of January and is based on what they have contributed in the past and any unused contribution room.
Employer match = multiple benefits
- Attract and retain talent: Offering a retirement savings plan is a great way to set your company apart from the competition. A matching contribution makes the deal that much better. And you can entice your employees to stick around longer, to gain the plan’s full benefits.
- Increased participation: A matching contribution requires employees to contribute their own money to the plan. The very existence of the match drives plan participation up, spurs employee engagement, and boosts the chances of retirement savings among your workforce. After all, why leave money on the table?
- Tax advantages: Matching contributions are tax deductible, which means your employee can deduct your matching contribution from their income so long as they don’t exceed CRA limits.
- Employee financial health: A matching contribution demonstrates that you’re willing to make an investment in your employees’ future, and the additional dollars can directly improve retirement goals and outcomes.
- Lower long-term costs: When evaluating the cost of an employer match, take the long view. Without a matching contribution, employees may have to work longer, which could lead to higher health-care expenses and lower productivity.
Offering a retirement savings plan is already a significant step forward in helping your employees save for their retirement. Providing a matching contribution boosts the benefits—for both your employees and your organization.
Ready for a smarter solution?
Whether you’re considering a matching contribution or not, Link Investment Management is here to help. We offer a digital platform that makes it easy for you and your company to set up and maintain a plan, with low-cost administration, guided onboarding, and expert investment and administrative support.
Link Investment Management Inc. is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.
