Advantages of Cost Sharing of Benefits
Lower oil prices and a strong US dollar have led to some challenging times for many Canadian companies; over the past few months employers have been looking for new ways to manage their operations in a more lean and efficient way. Cost sharing of benefits is a trend that we are seeing being adopted by many companies across a wide variety of industries. For an employer, there are a number of advantages to cost-sharing if it is structured and implemented in the right way.
What is Cost Sharing?
Like the term suggests, cost sharing means that health benefit premiums are shared between the employer and the employee. The most common sharing arrangement that we see is a 50/50 split between employer and employee but employers have the ability to increase or decrease these amounts according to their own needs.
Are There Tax Consequences to Cost-Sharing?
There can be. It’s very important to structure the cost-sharing arrangement so that there are no negative tax consequences for the employee in the event that they make a claim for short-term or long-term disability. Both STD and LTD are considered taxable benefits; this means that if the employer has paid anything at all towards the premiums the benefit is fully taxable in the hands of the employee if they make a claim. For this reason, it’s important to structure the cost-sharing arrangement so that the employee’s percentage of the premium is allocated first to their STD and LTD premiums and then to the other components of the group benefit plan (life insurance, AD&D, CI etc.) rather than just doing a straight 50/50 split of premiums.
Jill works for Awesome Employer Inc. The company health benefit plan is set up as a 50/50 cost-share of premium and the monthly costs are allocated as follows:
As you can see, the premium is split 50/50 between the employee and the employer with both paying $240.68 per month. However, the employee portion covers 100% of the cost of the disability and life premiums while the employer portion covers the health and dental costs. Dividing the premium up in this way means that if Jill makes a disability claim, all of her benefits will be paid tax-free because her employer didn’t pay any of the premiums.
What’s the Difference Between a Taxable Benefit and a Taxable Premium?
A taxable benefit is any benefit that is taxable in the hands of the employee should they make a claim. In the example above, if Jill makes a disability claim, the payments she receives will be non-taxable because she paid 100% of the premiums. If her employer paid anything towards the premium cost then her disability coverage would be considered a taxable benefit and any payments she received as the result of making a claim would be treated as taxable income.
With life insurance, AD&D and Critical Illness insurance, any money that an employee or their beneficiaries receives as the result of a claim is tax-free. However, if the employer covers all or part of the cost of the premium, that amount is considered a taxable premium to the employee and is added to the employee’s T4 each year and taxed as income.
In the example above, because Jill is covering 100% of the cost of the life premiums (personal life insurance, AD&D and dependent life), those premiums are not considered taxable and will not appear on Jill’s T4.
How Do I Know if Cost Sharing Makes Sense for my Organization?
Sharing the costs of an employee benefit plan has many advantages for an employer. The most significant of these is the lowered cost to the employer of offering the plan but other benefits include increased employee awareness of the costs associated with the plan and lower claim volumes because employees have a vested interest in keeping the plan costs down. With the current economic challenges in the energy sector, many employers are looking for ways to reduce costs and employees are more open to cost-saving measures such as reduced hours or cost-sharing of benefits as an alternative to extensive job cuts. This makes it a good time to evaluate your health benefits plan and to consider whether cost sharing of benefits is right for your organization.