Stay up-to-date with the latest insurance and investing news, tips, and information.

The Often-Overlooked Tax Advantages of Employee Group Benefits

June 22, 2021

For most entrepreneurs, running their own business can be a personally satisfying experience, but not without its challenges. Small business owners, in particular, worry about attracting the talent they need to succeed, as experienced employees are hard to find and entice away from bigger companies.

Offering the same employee benefits as big businesses can be a stretch for many small business owners who grapple with tight budget constraints.

Retaining Employees With Group Benefits vs. Salary Increases

Keeping employees happy is also a priority, but the question is, how? Many employers use salary increases to compensate employees for a job well done.

But are there other options to reward strong performance?

A group benefits plan may be the answer.

READ: 3 Benefits of Employee Benefits

The hidden costs of salary increases

To give an employee $1,000 more in salary, the employer may also factor in payroll taxes such as:

  • Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
  • Employment Insurance (EI)
  • Workers’ Compensation
  • Employer Health Tax (EHT)

Also, the employee has to contribute their portion of some of the payroll taxes, such as CPP/QPP and EI.

Note: EHT is exempt for the first $1 million in salary and workers’ compensation varies depending on the industry. Consult with your accountant or tax advisor for additional details.

Get more out of each compensation dollar

Alternatively, employers can use the same $1,000 and invest it in an employee health and dental plan. In this scenario, employees will receive all of the $1,000 in health and dental benefits.

Provincial sales tax is charged on the plan’s premiums, but the tax burden is lower than the payroll taxes charged on salary.

Group Benefits and Taxes Example

Consider Donna, who earns $38,000 per year working for a small tool and die firm in Ontario. Since her company doesn’t have over $1 million in salary, it is exempt from EHT. Her employer has the choice of:

  • Paying her an additional $1,000 in salary
  • Putting the $1,000 towards a group health and dental plan

If Donna’s employer paid her $1,000 in salary

Her employer pays the $1,000 salary plus CPP, EI, and Workers’ Compensation.

Donna gets $1,000 less deductions for CPP, EI, federal and provincial tax.

While each employee’s income situation is different, you can see that an additional $1,000 in gross income for Donna only results in additional take-home pay of $634.

If Donna’s employer paid her $1,000 in group benefits health plan

Her employer pays the $1,000 premium for health coverage plus 8% Ontario Retail Sales Tax.

Donna gets $1,000 in health insurance, tax-free.

Compared with the $1,000 in additional income, you can see that Donna receives the full $1,000 benefit meanwhile the employer is paying a similar amount.

Other Tax Considerations

  • In provinces where there is no sales tax, the employer cost in this example would be even less.
  • The above example is for a health and dental plan. Employer contributions to a life plan are a taxable benefit to the employee, and benefits from an LTD plan are only tax-free if fully funded by the employee.
  • Individual tax rates vary by income and province.
  • Applicable payroll taxes vary by province, and some such as CPP and EI have maximum contribution levels.
  • In Quebec, tax savings from a benefits plan would be on the federal tax portion, since health plans are taxable benefits for Quebec provincial income tax.
  • Employers should consult with their accountant or tax advisor for additional details.

Employees Appreciate Their Group Benefits Plans

Not only is a group benefits plan a tax-effective use of compensation dollars, but employee satisfaction with their plans is also very high.

According to the sanofi-aventis 2006 Healthcare Survey, if given a choice, 63% of respondents would keep their health benefits rather than receive an extra $15,000 cash payment per year.

Contact a Scrivens Group Benefits Specialist today to help attract and retain your employees.