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Group Benefits vs. Salary Increase

Originally published in the BenHive Blog: Business Intelligence for Advisors

According to the Sanofi-Aventis 2011 Healthcare Survey, plan members continue to think highly of their health benefits, although not as strongly as in previous years.  When offered a choice between their benefits and up to $20,000 in cash, respondents prefer to keep their benefits, with age being a major determinant.

Group Benefit plans allow employers to reward their employees by providing them with a form of compensation that, in most provinces, is non-taxable. Because employees receive the full benefit of every dollar their employer spends, they get more out of their benefit plan than they would a pay increase. Pay increases are impacted before payment by both a variety of employer payroll taxes and by employee income taxes. With a group benefits plan, employer contributions are treated as a tax-deductible business expense and employees receive health and dental benefits tax-free.

A 5% pay raise costs the employer up to an additional 16% on payroll taxes, while the employee loses 42% of that raise to the government.

What are some of the hidden costs of a pay raise?

  • Canada Pension Plan / Quebec Pension Plan (CPP/QPP)
  • Employment Insurance (EI)
  • Workers Compensation
  • Employer Health Tax

In addition, the employee has to contribute their portion of some of the payroll taxes, such as CPP/QPP and EI.


Employee benefits plans make good financial sense

Alternatively, if the employer put the 5% increase towards a group health and dental plan, the entire amount goes to the plan to directly benefit the employee. Provincial sales tax and premium tax are charged on the plan’s premiums, but those taxes are still less than the payroll taxes charged on salary. With a group benefit plan, health care, paramedical and dental costs have minimal-to-no impact on the employee’s income.


Employees value their employer sponsored group benefit plans

Canadians place a high value on their employee benefits plans, more so than cash. Employer sponsored plans provide security; employees know they’ll be covered in the event of a critical, potentially expensive, unforeseen medical situation. As published in the 2011 Sanofi-Aventis Healthcare Survey 50% of Canadians would choose their benefit plan over a $15,000 salary increase.

Employees understand how much they earn in cash.  What they frequently don’t understand is the value of the benefit plan offered.



*Data taken from the 2011 Sanofi- Aventis HealthCare Survey

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