This is part 2 of our series on Hidden Liabilities for employers. You can find part 1 here.
While part one discussed liabilities associated with day to day administration of Canadian benefit plans, part two outlines structural pitfall decisions related to plan structure. These decisions are often made when a plan is first established and may not have been reviewed or updated recently. Best practices suggest that the following items be considered annually.
3 Ways of Reducing Risk While Administering a Benefits Plan
Choose a mandatory plan over a voluntary one
When it comes to offering your benefits package, 100% enrolment is the safest way to ensure all eligible employees are covered after the applicable waiting period. However, in some instances, employers prefer that enrollment be voluntary.
An important thing to note is that in order to offer a voluntary plan, most insurers will require a minimum participation rate of 75% for health plans. When joining the benefits plan is optional, your business can be exposed to hidden liabilities in the following ways.
Not Meeting the Minimum Participation Rate
Unfortunately, voluntary enrollment creates a level of unpredictability. You may be under pressure to meet the requirement of a 75% participation rate by your insurer. If 25% of your employees have refused the benefit plan, how can you ensure that no one else chooses to opt out?
By providing employees with the option of voluntary enrollment, while attempting to bring up participation to meet the threshold, there might be a reputational risk. This can create an imbalance in the workplace, and disgruntled employees in the long run.
Employer Liability Regardless of Employee Denying Benefits Plan
Your employee has chosen to refuse the benefit plan. This may be due to a perceived lack of need for the benefits, having coverage through their spouse (see part one) or a lack of desire to pay premiums. Regardless of the reason, if they or a family member later develop a serious illness and wish to join the plan, what does this mean for your company?
With the exception of a spouse losing coverage through their employer, the insurer is under no obligation to extend benefits. If the insurer refuses, the employee will likely look to you to cover the cost of their medical expenses. Even if a waiver has been signed, an employee, his spouse, or dependents may take you to court claiming that they never fully understood the consequences of waiving the benefits.
One further point on voluntary plans is that liability may also exist with retirement and savings plans. It is possible that an employee who fails to save sufficient funds for retirement or who invests unwisely may seek redress from a former employer. It is generally recommended that all eligible employees be given the opportunity to join the plan each year. Should an employee refuse to join the plan- especially one with an employer contribution- a new signed waiver should be placed in their file annually.
Make sure you are paying the right premiums
The allocation of premiums between the employee and employer and the tax implications that result are often misunderstood. With any cost-sharing arrangement, employers are required to pay a minimum of the total premium. The threshold is usually 50%.
Best practices have the employee pay the premiums for the taxable benefits such as life, AD&D, and CI through payroll deductions whenever employees are responsible for paying part of the premiums. In cases when an employer pays 100% of the premium, the taxable benefits must be reported on the employee’s T-4. Taxable benefits may vary between provinces, so it’s important to base the allocation of premiums on where your employee works.
The cost-sharing for Long Term Disability premiums is unlike the benefits mentioned above and depends on the contract with the insurance provider. If Long Term Disability benefits have been set up with a non-taxable schedule, it is important that the employee pays the full premium. Any payment by the employer will result in the benefit being deemed taxable by CRA.
As a result of this, the employee will receive less income than expected during a time of significant need. In this instance, the employee may look to you to make up the shortfall. Of course, an employer can pay the disability premiums but it’s important to ensure that a taxable disability schedule with a higher replacement percentage is put in place with the insurance provider.
Know the rules about multiple companies on the same benefits plan
There are very specific rules about having multiple companies on the same benefit plan. This includes holding companies, sister companies and subsidiaries in your corporate structure. Generally speaking, insurers require a minimum of 50% in common ownership between the contract holder, usually the main operating company, and sister companies or subsidiaries. Once the minimum ownership threshold is met, it is important that each related company be named in the contractual documents.
If employees from a company with less than the required ownership percentage are included in the benefit plan, the insurer may deny coverage. The danger of not conforming with the minimum ownership rule is that while payment for routine health and dental claims will be paid, other more costly claims such as disability, life or out-of-country claims may be denied, leaving your firm liable.
One other point to note is that if shareholder-employees or incorporated professionals, such as lawyers, are being paid through their holding companies rather than directly from the operating company or partnership, you must ensure that the holding companies are named as affiliated companies in the contracting documents.
Seasonal and Contract Employees
When long term seasonal and contract employees work for a company, the most common question is “Can I jump onto your Group Benefits plan?”. Because these long term seasonal and contract workers seem like “regular” employees, plan administrators often reply YES”. However, they may be over-promising. Leave the company liable to pay claims out of its pocket because the worker was not eligible to be enrolled or not eligible for the same coverage as your regular employees.
Insurance carriers have strict rules around offering benefits to seasonal and contract workers. Most commonly, they will not offer disability benefits.
Before a carrier will give approval to add a seasonal employee or contactor to the benefit plan, they will want to know the following:
- How many hours per week do they work and how many months a year do they work?
- Does this person have annual contracts or multi-year contracts?
- Does this person only work for the one employer or do they work for multiple employers?
- Will the employer make payroll deductions?
Depending on how you answer the above questions, an approval may or may not be forthcoming.
Also, if you receive approval for the seasonal employee, you must offer the benefits to all seasonal employees, not just one person. It would be discriminatory to offer only one person benefits and not everyone in that same class.
Even though these risks exist, there are ways of protecting your company from them. Being aware of these liabilities, and knowing how to correctly administer a benefits plan can help you save money and reduce stress. Having an advisor who you can inform in advance of any anticipated changes will ensure that your employee benefits plan does not become a liability to your business. A well-designed and administered benefits plan is valuable to your company and your employees.
Download our webinar recording below to learn more.