If you’re responsible for the setup and administration of your company’s employee benefit plan, you may want to pay close attention to how you set up your boss on the plan. This specifically applies to business owners or shareholders of the business. Most don’t realize this, but group benefit plans work really well for employees, but the same doesn’t necessarily apply to employee benefit plans for bosses. The rules for shareholders can be very different, depending upon how the organization is structured.
Taxable Implications to Business Owners
Often I see business owners put under the same plan as employees. They may be included as Management but seldom do I see the owners set up under their own classification. As shareholders or business owners, they shouldn’t have co-pays, deductibles or payroll deductions for participating in the employee benefit plan. They should be able to submit 100% of their eligible health and dental expenses through the company plan. They shouldn’t be paying any portion of these expenses in after-tax dollars provided these expenses are fair and reasonable. This can be done under an insured format, ASO or Health Spending Account funding model. We would recommend putting all non-catastrophic benefit components under a Health Spending Account as not to incur excessive administrative fees from the benefits provider.
Set Up a Private Long Term Disability Policy
Long Term Disability is another area of your group benefits plan that needs to be looked at differently for business owners and shareholders. Group LTD limits are largely derived from T4 earnings. LTD doesn’t capture dividend income for business owners. Shareholders may decide to take dividend earnings over a salary for several different reasons. Group plans rarely take into consideration dividend payments when determining business owner LTD. This is something that needs to be addressed specifically with the insurance carrier and not the broker. If they say that dividend earnings are covered, make sure that it is specifically addressed within your contract.
If dividend earnings are important to your boss, you will want to suggest a private LTD plan to compensate for the shortfall.
Consequences of Taking a Dividend versus Salary
Many business owners will make dividend payments instead of a salary. Be aware that the Canada Revenue Agency and your benefits carrier may not recognize a dividend only as a justifiable employee relationship. CRA sees the relationship between a company, and its employees largely based upon T4’d earnings. If CRA sees that if such a relationship doesn’t exist, they may deem the employee benefit plan as a taxable benefit whereby is now subjected to tax.
The insurance carrier may see a similar issue. It’s not so much an issue of paying health and dental expenses but could become an issue if the owner makes a claim on the Group life, LTD or Critical Illness portion of the plan. Business owners may be deemed ineligible to receive the benefit.
This is an essential item to discuss with any shareholder who receives the lion share of his/her income through dividends and wants to participate in the company benefits plan.
Cost Plus versus Health Spending Account
We often see business owners putting exceptional health and dental expenses (like orthodontics, laser eye surgery) through their plan on a cost-plus basis. If cost-plus is only available to the business owner, then it would likely be deemed a shareholder benefit and potentially subject to taxation by CRA. Only if Cost-Plus is available to all employees would this bypass the CRA litmus test; however, many companies would not want to expose their businesses to such a high potential cost.
Add a Health Spending Account to the business owner’s benefit plan instead. The amount needs to be predetermined in advance, but if no costs are incurred, then the company is not charged. This eliminates the risk of CRA scrutiny plus allows comprehensive coverage for items that fall outside the benefit plan yet eligible as a business expense and not a taxable benefit to the business owner.
Setting Up Your Boss with a Health Spending Account Only
If the business owner has a spouse that works and has access to an employee benefit plan, an option may be to set up an HSA account only. Because HSA’s are not deemed a benefit plan, the rules of Coordination of Benefits do not apply. The spouse’s plan becomes the first payor for health and dental expenses for the family. Any costs over and above the spouse’s plan can be paid through the HSA of the business owner.
Note that if the spouse was to change companies or to stop working, the family might not have a benefit plan. The business owner would require medical underwriting to join his company’s plan. This is not something we necessarily advocate, but it is an option for those who may want to look at different cost-saving vehicles, albeit a short-sighted one.
You may want to discuss this with your boss, make he/her aware of the opportunity and potential consequences. You’ve now equipped the business owner with the information to make the right decision.
Conclusion: Setting up Employee Benefit Plans for Bosses
As you can see, business owners can’t be lumped into the same category as employees when it relates to company employee benefits plans. Some unconventional questions need to be asked to the business owners on the plan. Otherwise, they could be subjected to some unfavourable consequences. Ask these questions upfront, and your boss will be thankful for your due diligence.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.