The Taxability Myth

Jun 19, 2012

Many advisors convince employers that the correct way to set up the premium share on a benefits plan is to ensure the employees pay for at least the Long Term Disability (LTD).  Some even go so far as to pay the LTD premium and then charge the employees a taxable benefit.  Both of these methods are to make the benefit, if received, tax free.  In fact, on average, less than 1% of employees are collecting disability at any given time.  Why make all employees pay the premium or the tax on the premium just to ensure tax free benefits?

If the employer pays the premium and makes the receipt of the benefit taxable, the premiums paid for by the employer are not taxed in the employee’s hands.  Consider the tax implications.  The marginal tax rates starting at $42,750 range from 29.0% to 38.4% across Canada.  This requires the employer to pay, based on a BC rate of 29.7%, $1.42 in order to get $1.00 in the employee’s hands.  Alternatively, the employer could pay $1.00 directly to cover the LTD premiums and save significant premium dollars. 

By implementing a taxable program and altering the schedule slightly, an employer can ensure the after tax benefit under a taxable plan equals that of a non-taxable plan (due to disability tax credits and a higher reimbursement level).  Additional costs are low – an appropriate taxable plan such costs roughly 10% more (approx.).  The net savings to the benefit plan constituents, therefore, as a whole ranges from 19.0% to 28.4%, depending on the province.

Please contact your TRG consultant to determine the best way to allocate employer and employee premium dollars.

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