Taxability Issues – Employee Group Insurance Plans

Employee group benefits programs are a tax effective way for employers to compensate their employees!

Employer paid employee group health and dental care plans are not taxable to employees in most provinces which means that employees can get more out of their benefits plan compared to regular pay increases.  In other words, if an employer puts $1,000 towards an employee group heath and/or dental plan instead of a pay increase, all of the $1,000 goes to the plan to the benefit of your employees – and tax deductible to you, the employer!

There are other taxability issues that employers should be aware of to ensure the maximum tax effectiveness of employer-sponsored benefits programs are realized for both the employer and the employees as well.

One of the reasons that Life insurance has become a staple in any employee group benefits plan offered by employers is the preferential tax treatment employee group life insurance has historically enjoyed.

As a cost of doing business, employers are allowed to deduct contributions they make toward group life insurance coverage.  All net contributions (contributions paid minus earned dividends plus sales and excise tax paid on such contributions) paid by employers to employer-sponsored life insurance benefits plans, including dependent life, are tax deductible by employers as a business expense and must be included by a covered employee in computing his/her taxable income.  The lump-sum death benefit paid out by group life insurance plans is still income tax-free.

Employers typically show as a separate amount on payroll statements to their employees what the taxable amount of income is for employer paid group life insurance coverage and T4 statements reflecting the previous year’s total taxable amount of income for employer paid group life insurance coverage.

The Canadian Revenue Agency’s (formerly Revenue Canada) Interpretation Bulletin IT-428 states that there are two circumstances in which Long Term Disability income received by a disabled employee will be considered non-taxable income.  One, where it is an "Employee Pay All" plan, in which the employees enrolled in the plan pay the entire premium or two, where an employer pays the premium on behalf of an employee, but the amount of paid premium is regarded as taxable income to the employee.

Steve Benson and Jardine Lloyd Thompson Canada Inc. recommend that employers review their respective employee group benefits programs and consult a legally qualified tax expert and also confirm with their current group insurer(s) what the taxability issues are on their respective employee group benefits programs.