Employee Benefit Plans and Tax
You’re probably already aware that sponsoring an employee benefits plan can help you out at tax time. Touted as a tax-deductible business expense, employee benefits do often have favourable tax implications, but there are also some complexities that you may not be familiar with. Keep in mind that taxation is a complicated issue. We’re going to look at employee benefits and taxation from a general perspective – it’s best to talk to a tax expert for specifics on your situation.
Credits vs. Deductions
When tax time comes around, there are two important terms that arise: credits and deductions. While they both improve your tax situation, they work in different ways.
Credits are amounts deducted from the income tax that you must pay. Credits are related to social programs and benefits. Common examples are Canadian Pension Plan (CPP) contributions, employment insurance premiums and medical expenses.
Deductions are a bit different. A deduction is an amount that can be subtracted from your company’s gross income in order to determine your taxable income. Most commonly, deductions include things like: premiums paid for employee benefits (only some!), RRSP and pension plan contributions and union/professional dues. A tax expert will be able to help you understand the difference between credits and deductions.
When it comes to employee group benefits, the majority of the time: if you (the employer) can deduct, then the benefits are taxable to your employee in some way.
Health and Dental
Health and dental are some of the most high-profile of all employee benefits. They’re claimed frequently, so tend to have a high value to your employees. As the employer, you can deduct health and dental insurance premiums from your taxable income. If your plan is Administrative Services Only (ASO), you can deduct claims and expenses. This is good news for you.
Health and dental are one of few employee benefits where employees get a tax break too! Your contributions to health and dental premiums are not taxable to your employees (except in Quebec). This is not the case with other employee benefits.
Life, Dependent Life, AD&D and CI
As the employer, the premiums you pay for life insurance, dependent life insurance, accidental death and dismemberment, and critical illness benefits are tax deductible expenses. Your contributions (the premiums you pay) are taxable income for your employees. The good news is the benefit paid (for example, a life insurance payout) is not taxable to the recipient.
The benefit paid for life insurance would be taxable to your employee if you (the employer) were to pay the death benefit directly to the recipient (like in an ASO arrangement). This is yet another reason that virtually all life insurance benefits are fully insured.
Disability benefits are slightly different. As the employer, premiums you pay for disability coverage can be deducted from your taxable income. Your employees also get a break and those premiums are non-taxable for them. This is the same as with the other benefits. Here is the important difference: if ANY amount of the premium is paid for by you (the employer), then in the event of a disability claim, the benefits paid to your employee are taxable income for your employee. This is not good news for the disabled employee.
As a result, many plan sponsors choose to have employees pay for the entire premium for disability coverage, so that in the event of a disability claim the employee would not be taxed on the benefit they receive. If you (the plan sponsor) pay for any portion of the premium, then the benefit becomes taxable. Whether or not the benefit is taxable depends on the tax situation at the time an employee becomes disabled; if you make a change after an employee becomes disabled so employees are paying for the premiums, it will not make the benefit non-taxable. It’s a good idea to explain to employees the rationale behind NOT paying for their disability benefit premiums (if you choose to have the employees pay for those benefits).
Other Tax Considerations
In addition to taxable income, and deductions, there are also other taxes to consider. All provinces apply a ‘premium’ tax on insured premium for group benefits. Depending on the province, it varies from 2% to 5%, but is included in the rates and is paid to the provinces by the insurer. Quebec, Ontario, and Newfoundland also apply it to ASO (claims and expenses).
In addition, some provinces charge sales tax (PST) on insured plans and ASO. GST/HST is not applied to insurance premiums or claims paid under ASO, but it is applied to expenses charged on ASO plans when there is no insurance element (for example: stop loss).
Talking to a tax expert will help you to maximize the tax benefits for your specific situation. We recommend speaking with an expert before making any changes to your benefit plan for tax purposes.
Good advice is key
Employee benefits and tax can be a bit complicated. A good employee benefits provider will consider tax implications when helping design a plan to meet your employee benefits goals. Review your options with one of our licensed advisors on the phone, or contact us for a comparison quote.
Whether you’re looking for extended health and dental coverage, disability coverage, or life and critical illness coverage, GroupHEALTH has affordable benefit packages that work as hard as you do.
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