Tax Status of Employee Benefits

Tax Status of Employee Benefits

Our sometimes overly complex tax system frequently confuses plan administrators and employees. In particular, the question of how each benefit is taxed frequently arises.

The current tax status is:

Life Insurance

  • Premiums paid by the employer must be reported as a taxable benefit to the employee in that year.
  • Benefits payable upon death are tax-free.

Dependant Life Insurance

  • Same as Life Insurance.

AD&D Insurance

  • Employer paid premiums ARE a taxable benefit (effective January 1, 2013).
  • Benefits payable are tax free.

Disability (Short and Long Term) Insurance

  • If any portion of the premium is paid by the employer, the benefits are taxable upon receipt by the disabled employee.
  • The employee must pay 100% of the premium for benefits to be received tax-free. An actual payroll deduction should be made.

Health, Vision Care and Dental Insurance (including Cost Plus and Health Spending Account)

  • Employer paid premiums are not a taxable benefit to the employee.
  • Benefits paid are not a taxable benefit to the employee.

Provincial premium taxes are payable on all insured benefits (excluding ASO) and are automatically included in the premium rates. These taxes are remitted by the insurer. At present, no sales or payroll tax is payable on employee benefits in provinces other than Ontario and Quebec.

If the employer and employee share the overall cost of the plan (e.g. 50/50), the plan can designate the employee's portion of the premium to cover the Disability and Life Insurance first. In this way, the plan can achieve the most favorable tax treatment.