Employers can offer several cost-effective, individualized benefit solutions
The increasing prevalence of flexible benefit plans means plan members have more opportunities available to them than the more traditional, one-size-fits-all benefit plans. One key difference is a member’s ability to use flex credits (effectively employer contributions) to pay for various plan options.
If the price tags of the coverage options selected exceed the available credits, the member is usually required to pay the difference. But if, after making selections, the plan member has flex credits left over, there are several solutions an employer can offer within the flex plan for employees to “spend” excess credits. Before choosing a solution, employers need to consider benefit plan objectives. Here are a few options for unused flex credits that can be offered alone or together:
Health-care spending account: Available flex credits can be used to establish a health-care spending account (HCSA) for a member or to add value to the HCSA if one already exists. This popular option does not result in additional taxable income to a member nor does it attract additional payroll-related costs for an employer. HCSA balances are subject to specific Canada Revenue Agency (CRA) rules that require the balance to be spent by the member within two taxation years. If not spent within that period of time, the amount is forfeited. For this reason, employers with flexible benefit plans usually offer employees at least one other option in addition to the HCSA deposit.
RRSP contribution: A flexible benefit plan can also allow a member to deposit the credits to a registered retirement savings plan (RRSP), though there are consequences for the member and the employer. The value of the deposit will be added to the member’s taxable income which is offset by the tax receipt issued by the institution managing the RRSP.
Since the contribution is considered taxable income, the employer is required to pay the applicable payroll costs (such as Canada Pension Plan, employment insurance, workers’ compensation and employer health tax), making this option somewhat less attractive from an employer’s point of view. To offset this additional cost, some employers choose to deposit only a portion of the remaining flex credits to the RRSP. For example if a member has $50 of available flex credits per month, the employer might allow $25 to be deposited to an RRSP. Once the flex credits are deposited as a contribution to the member’s RRSP, they become the unconditional property of the plan member.
DPSP contribution: As an alternative to the RRSP contribution, an employer might consider allowing members to deposit available credits to a deferred profit sharing plan (DPSP). This avoids the need to include the amount in a member’s income and, therefore, does not trigger additional payroll costs for the employer. This option is also advantageous because the contribution is subject to the vesting provisions of the DPSP contract. If an employer does not have a DPSP, it can be arranged through most insurers. But a DPSP is subject to Capital Accumulation Provision guidelines like any other capital accumulation plan, so there are fiduciary responsibilities to manage.
Cash: This is fairly straightforward — like an RRSP contribution, the amount must be added to a member’s taxable income with all the accompanying payroll costs. Unlike an RRSP, the employer must recognize this amount when determining the member’s income tax withholding amounts. The CRA allows an employer to consider regular contributions to an RRSP when determining tax withholdings but this is not the case if a member takes the available credits as cash.
Lifestyle spending account: Lifestyle spending accounts have gained popularity in the past few years and are often linked to a formal health and wellness initiative. The idea is to create a balance of available funds that a member can use to purchase items or services — such as sporting or exercise equipment, yoga or fitness classes or health club memberships — that are beneficial to the member’s health and wellness. There are many items that can be included and the employer’s objective is to encourage improved lifestyles for a positive effect on productivity. There is no special tax treatment so the amounts used for these expenses are considered taxable income in the hands of the member.
Scott Hunter is president of Easyflex Benefit Solutions in Ottawa. He can be reached at (613) 728-7030 x. 224 or [email protected]. For more information, call (800) 939-7176 or visit www.easyflex.com.
