The end of another year is fast approaching, and it’s typically at this time of the year when companies will provide employee performance reviews, alongside any bonuses and raises for a job well-done. While many employees might jump at the opportunity for a salary increase, some companies are offering rewards in the form of an employee benefits plan. Why? Because the tax advantages for both the employer and its employees are more lucrative.
Why a Benefits Plan Is Sometimes Better than a Raise
For example, when a business owner provides an employee with a salary increase, they will incur an average of an additional 10% in payroll taxes which include costs such as Canadian Pension Plan (CPP), Employment Insurance (EI), Workers Compensation, and more. The employee will also have to contribute to the CPP and EI, and is subject to federal and provincial income tax. Therefore, a $2000 raise, really costs the company approximately $2200. Assuming a 35% total tax rate and another 5% total deduction for CPP and EI, the employee only takes home about $1200. When an employee has any medical or dental expenses, it will come out of pocket from that after-tax income.
However, if an organization were to put that $2000 towards a benefits plan, then the amount becomes a tax-deductible expense for the company, and health & dental benefits plan reimbursements would be tax free for the employee. This is assuming that the company is paying 100% of the plan’s premium.
Companies can also share the cost of the benefits plan with employees, covering a minimum of 50% of the plan costs. The employee would be subject to a payroll deduction for the balance of the premium. Once again, whatever costs are covered by the employer are tax deductible expenses. Any medical, dental or other reimbursement covered under the benefits plan is considered non-taxable income for the employee.
Considering Your Employees’ Input and Involvement
Some employees might not recognize the immediate tax advantages of a benefits plan, so it’s important to present them with this information. As an experienced benefits consultant, we also advise our clients to anonymously survey their employees to better gauge their level of interest or hesitation about implementing a benefits plan.
Asking the right questions in a survey might reveal that some employees’ needs. What we have discovered amongst some clients is that they are unable to come to a consensus with a traditional group benefits plan where one plan design fits all. In this case, suggesting more flexible options such as a Flexible Benefits Plan or a Private Health Services Plan might be more attractive to these types of employees. These plans provide more freedom to employees by letting them use an allocated budget for the type of services they value most.
Relying on a Trusted Benefits Consultant
All of these tax details can become complex. So if you’re considering implementing an employee benefits plan, rely on the expertise of our team at BenefitDeck and our knowledgeable accountant partners. Not only will we shed light on the specific tax advantages of an employee benefits plan for your company, but we will work with you to build a benefits plan that reflects your organization’s unique needs. To learn more about the tax advantages of benefits plans, read our previous article titled “5 Must-Know Tax Facts Related to Your Benefits Plan”. Want to learn more about setting up an employee benefits plan? Contact our team today.
Whether you are with a business, association, or owner operator, we have the solution for your needs.