THE BEST TAX-FREE EMPLOYEE BENEFIT
Questions for accountants and financial planners:
Can you name the most generous tax-free employee benefit perk?
Can you name the most ignored and poorly utilized tax-free employee perk?
Answer: A defined contribution health benefit plan, commonly called a health spending account.
The standard for group benefits in Canada is the traditional insured group health benefit plan, which is administered by major insurance companies.
The traditional insured group health benefit plan provides poor value for the small businesses and for their employees.
With the defined contribution health benefit plan, the employee can expect double the health benefit value for the same premium cost for the small business employer.
DOUBLE THE HEALTH BENEFITS FOR EMPLOYEES FROM THE SAME PREMIUM FOR THE EMPLOYER
How can such popular traditional benefits provide such poor value for small business owners and their employees?
Traditional insured group health benefit plans and defined contribution health benefit plans are tax efficient for the small business owner in that premiums can be deducted as a cost of doing business.
However, there is no comparison between traditional insured health benefit plans and defined contribution health plans when it comes to producing the health benefit value for employees.
TRADITIONAL GROUP HEALTH BENEFIT PLANS ALMOST WIPE OUT THE TAX BENEFITS FOR EMPLOYEES
How can this be?
The Canadian Revenue Agency (CRA) permits all eligible health benefits to be 100% tax-free. This includes common health benefit needs such as eyeglasses, dental braces, dental tooth implants, hospital care, medical alliances, etc.
Unfortunately, traditional insured health benefit plans require employees to pay 20– 50% of the cost of many benefits covered in their plan and 100% of the cost of benefits that are not included in their plans.
Traditional plans require employees to pay after-tax dollars for benefits that are 100% tax-free in a defined contribution plan.
To make matters worse, when faced with relentlessly increasing group health premium costs, many small businesses and brokers require employees to pay 50% or more of the premium cost. There is no income tax deduction for employees for these costs, which are paid with after-tax dollars.
When premium costs and co-payments and deductibles are included, most employees would be better off paying for their benefits directly with after-tax dollars than paid through a traditional insured group health benefit plan.
NO TAX BENEFIT? SCRAP THE PLAN.
A DEFINED CONTRIBUTION GROUP HEALTH PLAN
There is a better option: Defined Contribution Health Benefit Plan
A defined contribution group health benefit plan permits an employer to put tax-free dollars in each employee’s health benefit account and allow employees to spend these pre-tax dollars on the health benefits they need and want without restrictions or plan rules (up to the maximum in the account).
And, employees are protected by catastrophic drug coverage if they develop a serious illness and/or disease.
The major reason that small businesses have not yet adopted this better option for group health benefits is that group brokers would suffer a loss of income, and therefore are not presenting this option. In addition, group brokers are not knowledgeable with taxes and have not calculated the significant benefits small business owners and employees would enjoy with defined contribution health benefit plans.
ACCOUNTANTS AND FINANCIAL PLANNERS FOCUS ON OPTIMAL TAX ADVANTAGE
Accountants and financial planners are focused on the financial health of small business owners and should be educating small business owners about this important tax-free perk.