17 Oct Taxable Benefits Setup – Medical Service Premiums
Providing an insurance plan for your employees is not only a great way to help keep them healthy and happy, but if they have an option to include their loved ones, it can keep their whole family healthy as well. All health plans require the company to pay money to the provider for the Employee’s Medical Service Premiums (MSP). The difference though is what amount a company is paying for the employee, versus what portion the employee pays from their own pocket. Even if the employee never actually receives the money that the company pays for these premiums on their behalf, it’s important to understand that all or a portion of this money is considered to be taxable income, and as such needs to be taxed accordingly.
This article will speak in generalities because although most plans are very similar, there can be differences. Be sure to ask the benefit’s provider what parts of the plan are taxable and what parts are not. A client asked me once for clarification on their premiums that looks something like this:
|Emp Name||Life AD&D||Dependent||Ext. Health Care||Dental||Total|
Even though there are a few different amounts listed, not all of them are a taxable benefit! By consulting this provider’s site, they had a handy guide (as most do) that stated only the ‘Life AD&D’ and ‘Dependent Life’ portions were taxable. So really there are two amounts we are considering in this statement.
- The Life AD&D plus the Dependent Life equals the total that is potentially a taxable benefits ($6.53 + $3.47 = $10.00).
- The remainder Extended Health Care plus Dental equals the non-taxable benefit ($75.56 + $115.04 = $190.60).
From that $10.00 above, it’s only a Taxable Benefit if the company is paying for a portion of the premiums. In other words, if the company is paying for 0% of this premium, then it is not a taxable benefit. Instead, it’s just a regular deduction because the employee is receiving 100% of their wages, being taxed appropriately, and then this MSP premium is being deducted back to the Company, so the Company can pay the premium to the MSP provider on the employee’s behalf.
If the company is paying for 100% of this premium, then it’s all the $10 is a taxable benefit, so this benefit amount would need to be added onto the employee’s paycheck, taxed, and then taken back off as a deduction.
Plans Where the Employee Pays a Portion of Taxable Benefit
For the rest of this example though, assume the company is paying for 60% of the premiums, so just $6.00 out of the full $10 will be the taxable benefit, and the rest it and 40% of the remaining MSP Premium is taken off their paycheck as just a regular deduction amount. Now that we have determined the amount that could be the taxable benefit to be $10.00, the next step is to determine how to apply taxes to this amount. For help with that, the Government of Canada has a few handy guides to help us out, such as this one:
In most (but not all!) cases, this benefit amount counts as Income and Pensionable Earnings, so Income Tax and CPP need to be applied. However, it is not Insurable Earnings, so EI is to be exempt.
- For this $6 Taxable Benefit then, simply create a recurring ‘Bonus’ for this employee that is EI Exempt.
- Next, recover the Taxable Benefit amount by using a regular deduction of the same -$6.00 amount to recover the taxable benefit amount, and you’re done!
- The remaining MSP premium amounts (the remaining 40% that the employee is paying for) is added as another deduction so it can be claimed on their T4 as Box 85 ‘Employee-paid premiums for private health service plan’.
Quick Reference: Two Situations for MSP Premiums / Taxable Benefits
In summary, there’s really two situations that apply.
If the employee is paying for 100% of their own MSP Premiums:
- Create a deduction for the total MSP Premium amount ($197.64 from the above example), and you’re done! This amount can be claimed in Box 85 on the employee’s T4.
Or a three-step process if the Company is paying a portion of the premiums:
- Create a bonus that is EI Exempt for the Taxable Benefit amount of the premiums that the Company is paying for ($6 in the above example) so this amount is included as part of the employee’s income.
- Create a regular deduction for the same amount ($6 in the above example) so the Company can recover this amount to pay to the MSP provider.
- For the remaining amount, create a deduction for the total employee’s portion of the MSP Premium amount (40% of $197.64 in the above example). This amount can be claimed in Box 85 on the employee’s T4.