Tax Implications of Employer-Provided Health Insurance
Written By Beth Porter, Noseworthy Chapman
Attracting and retaining employees has never been more challenging, and a good benefits plan, including health insurance coverage, is often the most important element of an employee’s compensation. It is becoming increasingly difficult to navigate the various types of insurances that employers can provide employees (including shareholder-employees) while minimizing the taxable benefit element for the insured employee and ensuring the deductibility of premiums by the business. While a thorough discussion on employer-provided insurances could be exhaustive, we will focus here on the basic planning, as well as some cautions.
Some of the typical insurances provided by employers include the following:
Private Health Services Plans (PHSPs) provide coverage for hospital or medical expenses incurred by the policy owner and their family members where those expenses are not covered under provincial health plan. PHSPs may be in the form of a contact of insurance or a medical care insurance plan. See CRA’s now archived Interpretation Bulletin IT-339R2 for the definition of a PHSP.
Group Sickness or Accident Insurance Plans (GSAIPs) cover the insured if they develop an illness covered under the plan, or they have an injury. These types of plans can include critical illness (CI) insurance, accidental death and dismemberment (ADD) insurance and short-term and long-term disability income insurance (DII). Here we will discuss only group plans, which by definition require that the plan cover more than one employee.
Premiums paid by employers towards these plans have the following tax implications:
Deductible by Employer
Taxable Benefit for Employee
Yes, if considered a reasonable business expense
Yes, if insurance benefits paid to the employee would be tax free
*see Note A below for an exception where DII premiums are paid by employer
Some notable cautions to avoid undesirable tax consequences include the following:
As referenced by Note A in the above table, where an employer pays DII premiums there is no taxable benefit related to the premiums paid, however any insurance benefits collected by the employee will be taxable income. If the employee pays the premiums, the receipt of the insurance benefits would be tax free.
Premiums paid by a taxpayer for an individually owned policy for themselves and their family are not deductible, however these premiums may be eligible for the medical expense tax credit (METC).
Premiums paid by a business for insurance to guard against a loss that arises where a key employee is injured or becomes ill are not deductible.
Where premiums are paid by a corporation with respect to a shareholder, it must be in relation to their status as an employee and not in their capacity as a shareholder. If deemed to be due to their shareholdings, the benefit will be taxed under s. 15(1) of the Income Tax Act (ITA) and the deduction of premiums will be denied to the company. Some of the factors to consider in determining a shareholder’s employment status is whether they are actively engaged in the business, the reasonability of all benefits considering the circumstances, the comparability of benefits to other arm’s length employees at similar businesses, and whether all shareholders and arm’s length employees are offered equivalent benefits. The CRA has stated that an employer may offer different benefits to different groups of employees with some being provided a higher level of benefits than others, as long as there is a reasonable basis for the difference. One example is providing a higher level of benefits for management groups vs. non-management employees, bearing in mind that if the only employees receiving the higher level of benefits are all also shareholders, it may be difficult to support that the benefits are due to their employment status.
Self-employed individuals carrying on a business may deduct PHSP premiums if certain criteria are met. Factors include how much self-employment income they have, whether they or any other family member has claimed a METC for the premiums, and also whether they have any arm’s length employees, and if so, are they offering equivalent coverage to those employees.
When structuring health insurance plans for employees, careful planning can ensure tax efficiencies for both the business and the employee. Not only is health insurance coverage an important part of the overall compensation package, it can also help ensure the well-being of the employee and their family, and serve as an incentive for increased performance where benefits are tiered for senior staff or high achievers.