Group health benefits and tax: what employers need to know

Sort the plan into its parts

A group benefits package usually bundles several different things: extended health and dental, life insurance, disability or income replacement, and sometimes a health spending account. The CRA does not treat them alike. Whether the premium you pay is a taxable benefit to the employee depends on the type of coverage, not on the fact that everything arrives on one invoice from one insurer.

Before enrolling anyone, ask the insurer or broker for the premium broken down by coverage type. You will need that split for payroll, and you will need it again if the plan is ever questioned. Also note who is covered. The CRA’s guidance applies to current, former and retired employees, so the answer still matters when someone leaves but stays on the plan.

Which employer-paid premiums are taxable

For a health and dental plan that qualifies as a private health services plan, the CRA says your contributions are not a taxable benefit. That is the usual result for a standard medical and dental package, but it is conditional, and the next section explains the conditions. Other kinds of coverage are treated differently.

Premiums you pay for a group life insurance policy are a taxable benefit to the employee. Group term life, the usual form of employer-paid life cover, is also taxable, but its value is worked out differently depending on whether premiums are paid regularly and do not vary with age or gender. Premiums for a non-group plan, meaning cover bought for an individual employee, are also taxable. Contributions to a group sickness or accident plan are taxable unless they relate to a wage loss replacement plan that pays benefits periodically rather than as a lump sum. The CRA will generally accept a plan as a group sickness or accident plan when it is both a group plan and an insured plan.

Provincial health coverage has its own rule. The CRA states that if you must pay the Employer Health Tax in Ontario, that is not a taxable benefit provided by the employer. Otherwise, premiums you pay to a provincial or territorial hospital or medical plan are taxable, so confirm the rule before applying the Ontario result to an employee working in another province.

Test the plan against the private health services plan conditions

A plan is a private health services plan only when all of the CRA’s conditions are met. Every expense it covers must be a medical or hospital expense, or a connected expense incurred in connection with one within a reasonable time afterwards. Generally, 90% or more of the premiums must relate to medical expenses that are eligible for the medical expense tax credit. The plan must also be in the nature of insurance, which the CRA describes as one party agreeing to indemnify another, for agreed consideration, against a loss or liability arising from an event, and it must cover only the employee and certain family or household members.

How the 90% test is measured depends on whether the plan is insured. For an insured plan, it looks at the premiums paid in the calendar year, and the benefits actually paid out are not part of the test. For a self-insured plan, it looks at the benefits paid to all employees in the year. The CRA’s own illustration has an insured plan where 92% of premiums relate to eligible expenses; it qualifies even though only 87% of the benefits paid were for eligible expenses.

A self-insured health care spending account follows the same method as other self-insured plans. Most employers offer them under one group plan, but the CRA notes that in rare cases each account can be a separate plan, which would mean each is tested on its own. Multiple plans cannot be combined to pass the test. If your plan lets employees spend on items that are not eligible medical expenses, ask whether it still meets the 90% condition before treating the contributions as tax-free.

Reimbursing medical costs without a plan

If you pay or reimburse an employee’s medical expenses without a qualifying plan behind the payment, the CRA says it is generally a taxable benefit. The page lists exceptions, including a medical examination that is required as a condition of employment and is primarily for your benefit, an employee with a severe or prolonged impairment, and counselling services. Confirm that an exception fits before leaving a payment off the T4.

This is a common trap for small employers. A one-off e-transfer toward a prescription or dental bill looks simple and generous, but without a qualifying plan it generally belongs in the employee’s income. If you want to support that spending, set up a plan deliberately instead of reimbursing case by case, and talk to your accountant first.

Set up payroll and keep the records

When a premium is taxable, calculate the value of the benefit, include it in payroll, and report it for current employees on the T4 using code 40. For former or retired employees, the CRA directs you to the T4A instead, with code 028 for non-group and group sickness or accident plans, code 118 for provincial or territorial plans and code 119 for group life insurance. For group term life, the $500 threshold for filing a T4A does not apply. Whether CPP and EI must also be withheld on the value depends on the benefit and on whether it is paid in cash or in kind, and the CRA benefits chart summarizes this row by row.

Keep the insurer’s premium breakdown, the plan contract or summary, any workings showing the 90% test, and a list of everyone covered, including former employees. Re-check the breakdown at each renewal, because a change in coverage can change the tax treatment of part of the premium.