Learning about Group Benefit Plans: Looking at the options

A benefit plan is definitely not a “one size fits all” solution. There are many variables to consider like the size of the group, the objectives and values of the plan sponsor and budget.

Traditional Benefits

Here are some of the common or traditional plan options available to employers:

Group Life Insurance

The are four types of Group Life Insurance benefits available:

  1. Employee Basic Life – The amount of coverage is generally based on either the employee's earnings or a flat amount.
  2. Employee Optional Life – This benefit allows employees to supplement their basic life insurance coverage. Optional Life coverage can be available to employees only or to both the employee and their spouse.
  3. Dependent Basic Life – This benefit provides a flat coverage on the spouse and their dependent children.
  4. Dependent Optional Life – The benefit gives the option to purchase more insurance on the spouse or dependent children.

Accidental Death & Dismemberment (AD&D)

Benefits are paid in the event that an employee’s death is the result of an accident, or if an employee suffers the loss of use of any one of a number of limbs or body parts.

Accidental Death & Dismemberment coverage is generally based on a flat amount of coverage (e.g. $25,000, $50,000, $100,000) or as a multiple of salary (e.g. 1 x salary, 2 x salary).

Short Term Disability (Weekly Indemnity)

This benefit pays an income during an employee's short-term absence from work due to illness or injury. It pays a weekly income based on a percentage of the employees gross earnings.

There are range of options to consider:

  • Waiting period – how long employees must be off work before they can collect benefits
  • Maximum benefit – the length of time benefits are payable.
  • Who is eligible – options are designed specifically for classes of employees.

Long Term Disability

Long Term Disability offers income replacement for disease or injury that would prevent an employee from working for an extended period of time. Benefits will be payable to age 65 as long as the disabled employee meets the Plan's definition of disability.

Health Care Benefits

Health Care Coverage benefits are becoming more valuable than ever because governments are slowly stripping away coverage to keep their costs in line.

Employees use health benefits most frequently to cover prescription costs but there is a lot more to health care plans than just covering Prescription Drugs.

Coverage also includes ambulance services, medical supplies & equipment, out-of-country medical insurance, hospital coverage, massage therapy, chiropractors, physiotherapy, vision care, and more. A wide range of options is available and plans can be tailored to the needs of every business.

Dental Care Benefits

Dental care benefits provide comprehensive dental services and supplies for plan members and their eligible dependants. The type and scope of dental services covered under a dental plan varies but most dental care services can fall into one of three major categories:

  • Basic – Basic coverage can include exams, basic restorative procedures, periodontal and endodontic services (including root canals), and repairing, rebasing and relining dentures.
  • Major restorative – Major dental benefits include crowns, on-lays and major restorative services.
  • Orthodontics – Orthodontic services include coverage for procedures and appliances, such as braces, wires, space maintainers and other mechanical aids required to straighten teeth and correct other defects.  Children's orthodontics can be covered as well.

Additional Options:

Critical Illness

This benefit pays a flat sum to an employee and/or Spouse & Dependant in the event that they are diagnosed with any one of several major critical illnesses including heart attack, stroke, cancer, kidney failure, and much more.

Cost Plus

Cost Plus (Medical Reimbursement Plan) is not insurance, but an administrative service that allows employers to pay for additional health and dental expenses allowable under Revenue Canada's guidelines if they are not covered under your standard employee benefit program.  Since Cost Plus expenses are paid with pre-tax funds from your business, and not the disposable income from your employees, it is a very tax-effective way to reward executives and longer-term and more senior employees.

Employee Assistance Program (EAP)

An Employee Assistance Plan is a professional counseling and referral service sponsored by the employer.  This benefit provides service to employees and their family members to help resolve or cope with personal problems in a confidential and voluntary manner.

An Employee & Family Assistance program can provide your employees with assistance on a wide range of topics including legal and financial issues, parenting resources, marital difficulties, addiction, or bereavement or advice for personal and work related problems.

By improving employees' health and well being, job performance will generally improve. Therefore, implementing an Employee Assistance Plan can result in a cost savings for employers.

Health Care Spending Accounts

A Health Spending Account (HSA) is an individual employee account that provides reimbursement for eligible health care expenses or other benefits that are not covered under provincial health insurance plans or other benefit plans sponsored by the employer.

A Health Spending Account can be implemented on a stand-alone basis within a traditional benefit plan or part of a flexible benefits plan.

Plan sponsors allocate HSA credits into each plan member's account every year. The plan member may use the allocated credits as needed for eligible health-related expenses. This can include, but is not limited to expenses such as:
•    Deductibles or co-insurance payments for health and dental expenses
•    Health or dental expenses in excess of maximum coverage amounts
•    A wide range of other health-related expenses not covered by your organization's health and dental plan that qualify as an eligible medical expense under the Canadian Income Tax Act

Flexible Benefit plans

With flexible benefits, plan members are able to choose the benefits and the level of coverage that's right for them.

Rather than provide a defined – one size fits all – package of benefits under a traditional benefits plan, a plan sponsor supplies plan members with flexible benefit options where they can use credits allocated by the plan sponsor to purchase their benefits coverage.  The employee can apply different levels of coverage for different benefit types. Plan members can reduce or opt out of coverage they don't need and enhance coverage they do need.

They can also deposit leftover credits into a Health Spending Account.

Group Financial Benefit Plans

Group RRSPs

One of the most common group financial plans is the Group RRSP.  A group RRSP is very similar to an individual RRSP you would open at a financial institution except that is administered on a group basis by the employer.  Employees make contributions to the group RRSP directly from their paycheque and the tax savings from the RRSP contribution can be applied to each paycheque immediately.  Employers have the option of matching employee contributions in some manner and although matching does make for a better plan, it is not required.

The contribution and tax rules for group RRSPs are guided under the income tax act.  Pension plans on the other hand are guided under pension law.

Defined Benefit Pension Plans

A Defined Benefit Pension Plan is a pension where the future benefit is known based on a specific formula that incorporates years of service, salary and a pension factor.  What is unknown with a defined benefit plan is the contributions to provide the benefit.  Employees may or may not contribute to the plan but in most cases, the contributions into the plan are usually shared by both the employee and the employer and can change depending whether the plan is properly funded to pay the required future benefit.  There are fewer and fewer defined benefit pension plans because they are more costly to administer (actuarial valuations are required every three years to determine if the plan is properly funded) and the liability of the plan is shared by both the employee and the employer.

Defined Pension plans really reward tenure of employees.  They are the best benefit to encourage and reward long term employees.  Employees who retire with a defined benefit pension, tend to have more stable, guaranteed income in retirement.  Defined Benefit plans are excellent sources of retirement income.

Defined Contribution Pension Plans

Defined contribution pensions are becoming much more common that defined benefit pensions because they are less costly to administer and the there is no funding liability on the employer.  There is some annual reporting required for both types of Pension Plans, but the Defined Contribution plan requires little or no actuarial intervention.

Under the defined contribution plan, the future benefit is the unknown. The future benefit depends on how much money is put into the plan by the employer, the employee and the rate of return earned by the investments. What is ‘defined’ in this plan is the amount of contributions that will be put into the plan. This is usually expressed as a percentage of income. Employees bear the market risk and, provided that contributions are remitted in a timely fashion, defined contribution plans are, by definition, always fully funded.

Deferred Profit Sharing Plan

A Deferred Profit Sharing Plan (DPSP) is an arrangement similar to a Defined Contribution Pension Plan whereby an employer distributes a portion of pre-tax profits to selected employees.  Unlike the Defined Contribution Plan, employees do not contribute to the DPSP.  The employer’s contribution is based on company profits.

Non-RRSP savings

Some employers will offer a group non-registered savings plan.  These typically are less common because there are fewer benefits to both the employee and the employer.  There are so many options available to individual employees outside the group and the money in these plans tend to be there for a very short term.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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