Why Employer Paying for Employee Benefits Makes Sense

Feb 16, 2015

Every now and then we hear a prospective client ask why they should pay for benefits when they can just pay to reimburse the employee directly for an expense.

The first and most important consideration is taxability. Premiums paid by the employer for extended health and dental plans (outside of Quebec) are tax free to the employee, however any amount an employer gives an employee in cash is taxable to the employee (the only exception being up to $500 annually for gifts and/or awards). An employer would have to pay considerably more than the cost of the service or supply in order to make the employee whole.

Consider an employee making an annual income of $44,000 in B.C. The cost to reimburse an employee $1,000 directly is $1,422 ($1,000 to cover the cost of the service and $422 to compensate for the increased income taxes the employee would have to pay). The cost of paying that expense through an insurer when the renewal is calculated would be much less for all but the smallest of groups.

The second consideration is time. When an expense is submitted to an insurer, the cost of adjudication is included in the insurer’s service. This saves the client time and money when trying to determine whether an expense is legitimate. Insurers have ready-made systems that apply reasonable and customary limits, adjudicate claims according to the terms of the insurance contract and include fraud detection systems, among others.

The third consideration for an employer to pay for employee benefits rather than direct reimbursement for a health expense is privacy and confidentiality. Both are ensured by having a third party adjudicate the claim. If an employee submits personal medical details to their employer in an effort to get an expense paid, privacy and confidentiality are breached, which can increase the risk of lawsuits.

If an employer does not want to insure, other tax effective alternatives include health and welfare trusts, personal health spending plans and health care spending accounts. These vehicles address the tax issue but other issues can arise relative to an insured plan. Those differences are too numerous to be covered in this blog.

It is imperative to understand the employer’s needs before recommending any plan or combination thereof. Please feel free to contact a TRG Benefits Consultant to discuss your needs for tax effective compensation.

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