Cost Sharing of Benefit Plan Premiums: Let’s Talk About Tax!

Dec 22, 2014

It is commonplace for an employer to share benefit plan premiums with employees but did you know that there are ways to structure this split so that it is more tax effective for your employees?

An employer who shares 50% of the premium with employees may choose to split the premium down the middle, charging employees half the cost of each line of benefit. However, doing so would make the premiums for any life insurance, accidental death & dismemberment (AD&D) and critical illness taxable to employees.

Below is a helpful chart to understand taxability of premium.

Taxable Premium Non-Taxable Premium
  • Life Insurance
  • AD&D
  • Critical Illness
  • BC Medical Services Plan (MSP)
  • Extended Health Care
  • Dental Care
  • Long Term Disability
  • Short Term Disability

Therefore, if there is a cost share arrangement for premium, it is most tax effective for employee premium to first go towards life insurance, AD&D, critical illness and MSP.  Employer premium should first go towards health and dental benefits.

Taxability of premium should not be confused with taxability of benefits that are received. With the exception of disability payments (ie. long term or short term), any benefits received are not taxable to an employee or their beneficiary. The only taxable benefits are long term disability and short term disability payments if any of the premium is deemed to be paid by an employer.

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