There’s been a lot of talk recently about reducing the size of the civil service. The organizations within the federal public service do this by reviewing their current jobs. If the department is considering eliminating a job, they send a Workforce Adjustment Letter to affected employees. If you receive a WFA letter, it means your job is under review and may or may not be eliminated. Keep reading for answers to WFA questions.
General Workforce Adjustment Questions
What is Workforce Adjustment?
If you are a member of the core public service, you may have heard the term “workforce adjustment”, or WFA. A WFA is a process the federal public service uses when it decides a position may no longer be required.
Who is affected and what triggers WFA status?
Indeterminate employees are affected by WFA. An indeterminate employee is one whose job has no specific end date.
WFA status is triggered by the department the employee works for. The organization decides that the employee’s job is no longer required.
What are my options when I receive a WFA letter?
A WFA letter doesn’t mean your job will be eliminated or you will be laid off. The letter advises you that your position is under review. The options available to you if your job is eliminated depend on several factors. Your department will let you know what you can expect. Options that may be available to you are:
- Voluntary Departure Program- If five or more positions are affected in your department and you no longer want to work for the government, you can leave the public service under the Voluntary Departure Program.
- Selection of Employees for Retention or Layoff (SERLO)- A SERLO will occur if there are too many employees left after a VDP. The organization will determine which positions to retain based on several metrics. If it maintains your position, you’ll receive a letter stating you are no longer affected by the WFA.
- Workforce Adjustment Status – The organization’s deputy head will decide whether to declare your position a “surplus with a reasonable job offer” or “opting and provided” with WFA options. If you are declared opting, you have 120 days to choose a 12-month surplus priority entitlement, a transition support measure, or an education allowance.
- Alternation- If you’re an opting employee who chose a 12-month surplus priority entitlement, you may be able to switch positions with someone who is not under the WFA but wants to leave the public service.
- Early retirement/retirement- Depending on your age and years of service, you may qualify for a waiver of the pension reduction for early retirement/retirement if you were laid off or had to resign due to the WFA.
How much notice is provided?
The notice period varies by WFA status: surplus employees have up to 12 months to find another position, while opting employees have 120 days to select an option. For exact dates, check with your HR department or deputy head.
Pension Decisions
Knowing your pension options, like the Immediate Annuity, Annual Allowance, or Deferred Pension, can help you feel more confident in planning your future.
Before deciding on how to take your pension, you need to find out what you’re eligible for. The government has pension rules based on your age, start date, years of service, how long you’ve been a member of the pension plan, and whether you’re part of a WFA.
- Immediate annuity- Payable immediately, and is based on a pension calculation of your accrued pension.
- Annual allowance – A pension payment that is permanently reduced, which you may be able to take as early as age 50.
- Deferred Pension- This can be your full accrued pension, which you take at age 65, or a permanently reduced pension, which you can take as early as age 55.
Before making your decision, consider:
- Lifestyle factors
- Retirement needs and expenses
- Whether you want to leave pension benefits to a surviving spouse
- Income tax
- The possibility of returning to work
Discussing your pension options with a financial planner is recommended to help you choose the best approach based on your circumstances and retirement goals.
How does retiring before age 55 affect the pension reduction?
Your pension is typically reduced by 5% for every year you retire before your eligible retirement date. You may qualify for a pension reduction waiver if you have been:
- An employee with the public service for 10 years or more
- A pension plan member for 2 years or more
- Are within 5 years of your normal retirement date
- Have been involuntarily laid off
You may also qualify for the bridge benefit.
What is the bridge benefit, and who qualifies?
The bridge benefit is a temporary benefit to top up your pension. To qualify, you must be under 65 and not receiving CPP or QPP benefits.
Can I buy back service while under WFA?
You may have the option to buy back service while under WFA if the public service still employs you.
How does pay in lieu of the unfulfilled surplus period work?
If your position is deemed a surplus, you may be offered the option of a Reasonable Job Offer. You have 12 months to exercise this option and find an equivalent position within the public service. If you are offered pay in lieu of the unfulfilled surplus period, you may be eligible for a lump sum payment that is equal to what you would have earned had you stayed until the end of the surplus period.
The maximum amount is six months’ worth of surplus wages. It cannot exceed what you would have received had you resigned instead. You are not entitled to pay in lieu of unfulfilled surplus work if a suitable position became available, and you declined to accept it.
Severance
Is severance taxable and at what rate?
Severance is considered income and is taxable at your marginal tax rate. If you can take your severance in payments instead of a lump sum, it may reduce your tax liability.
Can severance be transferred directly to my RRSP?
You can transfer severance to your RRSP directly, up to your available contribution room.
When should I maximize RRSP room to reduce tax?
Maximizing your RRSP contribution when your income is high may be the best option to reduce your taxes, especially when a lump sum severance payout will put you in a higher tax bracket. You can carry forward unused contribution room from previous years to maximize your contribution. Alternatively, you can claim your RRSP deduction in future years.
What are strategies to reduce taxes on severance?
Strategies you can use to reduce taxes on your severance are:
- Transfer as much as possible to your RRSP
- Take your severance in installments rather than a lump sum
- Use your RRSP deduction for the year in which your tax bracket is the highest
EI and Income Gap Planning
Do I qualify for EI during a WFA?
WFA is not necessarily a layoff notice. However, if you voluntarily resign from a Voluntary Departure Program or are laid off, you should qualify for EI. Check with EI to get complete details on whether you are eligible, how much you qualify for and when you can expect payment.
How does severance impact EI waiting periods?
Severance and any Transition Support Measure may delay the first week due to the allocation of those payments being based on your normal weekly pre-tax earnings.
How do I bridge the gap if my pension doesn’t start right away?
Your severance pay and EI will help you bridge the gap. Returning to the workforce until you can collect your pension is another option. If you have RRSPs, you can convert them to a RRIF to generate an income stream. Consider drawing on your savings or investments to bridge the gap between your layoff and the start of your pension.
How much tax should I withhold on EI?
EI typically withholds 10% for tax purposes. You can increase the amount withheld up to 30%. A tax professional will look at your tax burden and can advise you on how much tax EI should withhold to minimize your tax burden.
Tax Planning
How can a high-RRSP-year strategy help offset WFA income?
If you have eligible RRSP contribution room, you can make a large deposit to your RRSP and reduce your taxable income. Any severance you receive from the WFA is considered income and will be taxed at your marginal tax rate.
Should I take CPP early or delay it?
Discuss taking your CPP early with a financial planner and a tax professional. CPP is taxable, so if you are receiving severance or other income, taking CPP early could increase your tax payable or put you in a higher tax bracket. You also lose 5% for each year you take it before 65. On the other hand, taking it early might be a good choice if you need the income.
How do I estimate my tax refund after contributing a large amount to my RRSP (e.g., $73,086)?
You can use an online tax refund calculator to give you a general idea of how much of a refund you can expect. A tax professional will provide you with an accurate amount.
Investments And Cash Flow
Where should I invest lump-sum payments?
It depends on what you want to accomplish with your payments. If you want to reduce your income tax and have available room, consider contributing to your RRSP. You’ll reduce your taxes payable, and earnings aren’t taxable until you withdraw them.
If you don’t have RRSP contribution room or you might need the money, you can contribute to your Tax Free Savings Account if you have available contribution room. Earnings within a TFSA are tax-free. You can choose short-term investments if you need to withdraw the money in the near future.
You can consider non-registered investments that offer tax-friendly returns, such as capital gains or dividends.
Should I keep my TFSA or use it as a buffer?
The best way to manage your TFSA will depend on your financial situation. However, you can use it for both short and long-term savings. The TFSA allows short-term investments, such as a cash account or a cashable guaranteed investment certificate, if you need the money. You can also invest the portion you don’t need in longer-term assets like mutual funds, stocks, and bonds.
Does WFA affect borrowing, refinancing, or mortgage approvals?
Lenders will check your employment status when you apply for credit because they want to make sure you have stable employment so you can repay the loan. If they find out you’re part of a WFA, they may decline you for a mortgage, refinance, or any type of loan. Mortgage brokers may approve a mortgage or refinance with uncertain employment if the borrower has significant home equity or a large down payment.
Insurance Considerations
What happens to my PSHCP and group insurance after leaving the federal government?
If you’re subject to a WFA and declared surplus with a reasonable job offer but don’t find an acceptable position, your benefits can continue for up to 12 months after your leave, as long as you pay your premiums and the employer’s share of the premiums.
Your coverage will continue if you retire and receive your pension immediately. If you don’t receive your pension, your coverage ends when your employment ends. One exception is if an insurance payment is taken in the month you leave the public service. When that occurs, your coverage ends the following month.
Should I convert my federal life insurance?
If you need life insurance, it’s wise to apply for it as soon as possible. Life insurance coverage ends when you are no longer employed by the government.
What private insurance makes sense post-WFA?
The type of life insurance you need depends on your circumstances. Term insurance works well for some people because it can cover their debts or childcare expenses if they pass away while they have a mortgage or are raising children.
Others will benefit from a permanent life insurance policy to cover funeral expenses, leave a legacy for their family or provide for their loved ones. A financial planner will take your goals into account when discussing insurance needs to make sure you get the right policy to meet your needs.
How we Help With WFA
Our team at MDL Financial Group offers expert assistance in transitioning from working for the public service to a life of new possibilities. We will work with you to answer questions, complete paperwork, discuss goals, and put a financial strategy in place so you can live your best life. If you’ve received a WFA letter, contact us online or by phone at 614-416-9649 today to schedule a discovery call to determine how we can meet your needs. We look forward to helping you navigate this time of transition!
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