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The T4 and Relevé 1 slip production period just ended, leaving us with a series of questions, doubts and issues about the taxable benefits related to group insurance plans. The following explanations are provided to demystify the calculations and prepare you for the next round!

General

The taxable benefits associated with group insurance stem from the share of costs borne by the employer. A plan which is 100% paid by employees would not entail any taxable benefit. Therefore, only the employer-paid portion is added to the employee’s taxable earnings. However, not all benefits are taxable! And the taxable benefits are not always the same for both levels of government.

Taxable benefits depending on the tax jurisdiction:

Federal:

• Life insurance (employee and dependents)
• Accidental death and dismemberment insurance (ADD)

Provincial (Quebec):

• Life insurance (employee and dependents)
• Accidental death and dismemberment insurance
• Medical care
• Dental care

Note:

• The short- and long-term disability insurance is not considered as a taxable benefit at the provincial or federal level.
• All taxes or administration costs charged must be included in the calculation of taxable benefits.
• The provincial payroll deductions (QPP, FSS, CSST, etc.) must also be applied to taxable benefits, with the exception of the QPIP, both for the employer and the employee.

Disability insurance specifics:

As mentioned, the employer contribution to disability insurance benefits (short and long term) is not taxable. As for the benefits received by disabled employees, they are not taxable if the cost of the plan is fully borne by the employees.

An employer who pays 100% of the cost of a plan which includes non-taxable disability insurance benefits must add this amount to the taxable salary of employees to comply with the law and avoid penalties for employees in the event of an audit. The payroll deductions applicable to the salary will apply to this amount both for the employer and the employee. It is the employer’s responsibility to ensure compliance with this legal requirement, as the insurer has no control over insurance cost sharing.

Tax Optimization

To minimize the income tax paid by employees, it is possible and even advisable to use tax optimization when part of the insurance cost is paid by employees. While this may seem fairly complex, it simply consists in using the employee’s contribution to pay first the benefits that are taxable at both levels of government, i.e. life and ADD insurance.

The total employee contribution is calculated on the basis of the established cost sharing and is then allocated first to the payment of life and ADD insurance. Of course, if the disability insurance benefits are not taxable, this sequence must be changed so that the contribution will be used to pay the cost of the disability insurance before life and ADD insurance.

What must you do with all this?

The answer depends on the financial arrangement of your plan.

Insured plans

Most life and ADD insurance plans are on an insured basis (vs. self-insured). In this case, the calculation of taxable benefits is easy: you just add up the portion of these benefits paid by the employer throughout the year. You do the same with medical and dental care if these benefits are also on an insured basis.

Self-insured plans:

The calculation gets complicated with self-insured plans. The Department of Revenue requires that the taxable benefits be calculated based on the actual cost of the self-insured plan, which can only be done once the calendar year claims are known (source IN-253). You can estimate the taxable amount for payroll deductions during the year, but a correction must be made at year end to reflect the actual situation.