Offering the right employee benefits can help employers attract and retain employees.

Navigating the complexities of benefits and taxes can be challenging, and Wellbytes here to guide you through the intricacies.  Before deciding to offer a benefit to the workforce, however, it is important to understand the difference between taxable and nontaxable benefits. This article will find out the tax-related aspects and considerations for employees.

Understanding Tax on Employee Premiums

Employee contributions towards premiums for various insurance policies, including Extended Health Care (EHC), among other benefits, are typically made with after-tax dollars from their paychecks.

Taxable vs. Non-Taxable Benefits

Not all employee benefits are taxed the same. Some are taxable, while others are not. Discussing taxes and benefits involves looking at two main aspects: the premiums paid (the cost of obtaining benefits) and the payouts received (such as reimbursements).

1. Premium Contributions

Cost-sharing between employees and employers is common for employee benefits plans. The portion of premiums paid by employers is treated as taxable income to the employee for a variety of benefits, including Life Insurance and Critical Illness Insurance. For instance, if you’re splitting the cost of a $20.00 monthly HSA (Health Spending Account) premium equally with your employer, you’ll pay $10.00, with half appearing as a deduction on each semi-monthly paycheck. Consequently, the employer’s contribution is taxed as part of your income.

The rules around the deductibility of these benefits and others can be complex and often vary based on the specific circumstances. Noncompliance with these rules can mean the benefit is taxable to the employee.

It’s important to note that the tax treatment of certain benefits might differ by province. In Quebec, for instance, premiums for EHC, Dental Insurance, and Health Spending Accounts (HSA) might be taxable.

Moreover, some premiums and out-of-pocket expenses qualify for a medical tax credit if they exceed 3% of net income.

2. Benefit Payouts: The Tax Perspective

The tax implications for benefit payouts, or what you receive after a claim is approved, vary. Generally, if you’ve paid premiums with after-tax dollars, most benefit payouts are not additionally taxed to avoid double taxation.

Employers should keep in mind that tax standing is not an issue for some benefits they may offer. For example, offering a remote, flexible or hybrid work arrangement does not have tax consequences. Benefits such as these are valuable to employees and can help attract new talent.