How much should your company spend on employee benefits?

The amount an employer should contribute into an employee benefits plan varies. It depends on your company size, employee classifications, industry, demographics, and more. But you should know that the benefits plan and provider you choose can greatly impact the cost-effectiveness of your budget, or in other words, your return on investment (ROI).

Did you know that approximately 40% of your health insurance premiums (and associated costs) go towards administrating and marketing the insurance plan... as opposed to your employee for their expenses? What if you could be getting the same value but saving on those 40% costs? That could add up to tens of thousands saved in a year, and much much more over a decade. 

That's something to think about when it comes to how much your company should spend on employee benefits.

A major factor to employee benefits is the cost-effectiveness of you company budget.

An efficient benefits plan involves less company spending but maintains high employee satisfaction. Basically, we want you to get more "bang for your buck".

Businesses typically waste thousands when using an insurance plan for their employee's health and dental benefits. 

Most employers use health and dental insurance as a means to offer some health and dental allowance to their employees, not as actual insurance. Although health and dental insurance is coined as insurance, it should not be categorized as insurance. Insurance is there to protect a pooled collective against an unplanned and catastrophic risk. Health and dental expenses rarely (if never) have unplanned consequences and when they do happen, are rarely catastrophic. 

Most health and dental events fall under the category of maintenance events. These maintenance events are non-catastrophic events that occur on a regular basis such as your dental checkup. There is really no reason to insure these events because you are better off paying for these expenses with personal out-of-pocket dollars. 

On top of that, insurance plans come with unrecoverable premiums, copay, restrictive coverage, pre-existing conditions, and deductibles. 

Tip: You can have significant cost savings by avoiding traditional insurance for your health and dental benefits.

For years, employers have used traditional health insurance plans to "insure" their employees and considered this a form of "employee benefit". Typically, the employer pays a premium (with contributions from employees) and the employee gets some of that money back in the form a medical expense reimbursement. However, they aren't getting the full amount back.

In 2011, employees were receiving $0.74 for every $1.00 paid to the insurance provider by the employer. With a rising disparity, it is typical for current day employees to only get $0.60 back in every dollar that an employer gives out. This is because the other $0.40 is used by the insurance provider for marketing and administrative purposes. 

Is there a cost-effective alternative to insurance?

A Health Spending Account (HSA) provides tax free health benefits to your employee with no restrictions, premiums, or hidden costs. It is a CRA-approved tax plan for incorporated businesses which ensures that the employee gets to spend the full dollar allocated to them. An HSA has a wide range of eligible HSA expenses and allows the employee to spend their allowance on what they want and where they want. 

If an employee has to pay for their employee benefit, is it really a benefit to them?

When you ask the employee to contribute to this plan, it ultimately defeats the purpose of providing employees with a free benefit.

In traditional health insurance plans, many business owners are used to the idea that both the employer and employees contribute. Keep in mind, health insurance is a taxable benefit to the employee.

When you use a HSA, all the reimbursements for medical expenses are tax-free, meaning employees are allocated tax free dollars to spend on their health and dental expenses. Allowing an employee to contribute to the HSA plan funding directly would eliminate the tax free benefits offered through an HSA. 

Remember: A HSA is an alternative to insurance, but not insurance.  

A HSA is an alternative to traditional insurance. It involves aspects of tax planning and as a result, are subject to certain tax implications to ensure that they are used for their intended purpose: providing tax-free health and dental benefits to employees. Here are some common questions which may confuse employers (and employees alike):

Should I let my employees contribute to the HSA plan?

There are no employee contributions with a HSA. Employees pay for their health and dental bills, then file a claim for reimbursement up to the limit set by the employer. Health and dental bills exceeding the employee HSA limit are paid out-of-pocket (not through the HSA) by the employee.

In the past, some business owners have asked if employees can contribute to a HSA plan if the employer-funded allowance was used up. It is easy to be mistaken into thinking that employees can reap the tax-free benefits even when they contribute directly into the Health Spending Account funding.

Let's get this straight: Employees should NOT contribute to the HSA funding with their own money due to the tax complications. Doing so would effectively eliminate the tax-free benefits of using an HSA in the first place. Only the employer should contribute to the HSA funding. 

This ensures that the HSA remains an employee benefit. After all, employees should NOT have to pay for their own benefits. This is a common misconception created by traditional insurance plans which encourages employee and employer contribution.

Scenario:

Let's say your employee spends their entire year's HSA allowance and wants more tax-free dollars allocated to their health spending account allowance. You (the employer) and employee agree that the employee contributes a certain amount from their monthly paycheck into their Health Spending Account. You go through this scenario because you think a Health Spending Account works like traditional health insurance. This is not correct. 

How much should I allocate into the HSA plan?

The amount an employer should allocate to the HSA depends on many factors and is largely up the discretion of the company itself. Employees can be classified into several classifications with different allowances. This allows employers to give more funding to roles with more responsibilities.

How much should I allocate to the different employee classifications under a HSA plan?

A HSA makes it easy for an employer to be creative and specific by using different classes for different employees.

For example: the annual HSA limit for a General Manager supporting a family may need to be higher than a newly hired customer service representative with no dependents. A few examples of classifications are: tenure, occupation, number of dependents or as a percentage of the employee's annual income.

It is advised that the highest allowance in a classification does not surpass a 10:1 ratio with the lowest allowance in another classification. For example, if an Executive receives $10,000 in allowance, then the lowest classification should receive no less than $1,000. This ensures that the HSA remains an employee benefit (and not a shareholder benefit) under the regulations set by CRA. 

Can I withdraw my employer-funded money out of the HSA?

Unused money leftover at the end of the plan year rolls forward into the next plan year to fund future claims. Surplus money in the claims funding account is refunded to the employer upon request. No money is lost in an unused premium.

By using a Health Spending Account...

Employees are allocated the full dollar to spend on their medical expenses. The administrative and marketing fees are bypassed. Employees are getting these dollars 100% tax-free. The cost is written off as a business deduction for the business... that's what I call cost-effective. 

Are you an incorporated business owner?

Set up a Health Spending Account (HSA) to provide 100% tax-free health benefits to your employees and a tax deduction for your business. It works for a family business (such as an independent consultant) or a business with arm’s length employees!

To learn more about a Health Spending Account, download our FREE Beginner’s Guide for a small business with arm's length employees: