Part 1: Payroll Deduction
In our blog today, we’re kicking off part one of our benefits cost sharing series with a discussion of how payroll deduction works, and the advantages it can offer.
According to the Toronto Board of Trade’s 2012 Benefits and Employment Practices Survey, 74.1% of employers are paying the full cost of their health care benefits plans.
With payroll deduction, employers do not need to bear the entire cost of the benefits and can instead share it with their employees. Employees become responsible for a portion of the benefits plan costs, and their share is deducted through payroll.
Payroll deduction can be set up in various ways. Either a flat amount or a certain percentage of the total cost per employee can be set to be deducted from payroll. 20% of benefits plan costs, for example, could be paid by the employee. Different amounts for employees who want single versus family benefits can be implemented as well.
As total benefits plan costs fluctuate over time, employees’ payroll deduction can be adjusted accordingly, to maintain the ratio of sharing. It is important for employers to communicate to their employees about how benefits plan costs are determined year after year. Implementing cost control measures and encouraging “smart shopping” will benefit employees and the employer alike when both parties are sharing the costs.
Some employers target payroll deduction for specific benefits. For long term disability (LTD) benefits specifically, there is a tangible tax advantage to having the employee pay their LTD premium. LTD benefits that are paid for by employees are non-taxable when received.
Conversely, when the employer contributes any portion of the LTD premium, the full LTD benefit becomes taxable during a claim.
To achieve tax-free LTD benefits, most employers deduct the actual per-employee LTD premium. Another strategy is to give priority to allocating the funds deducted as a percentage of the total from each employee, to LTD premiums first. It is important to ensure that a minimum of the LTD premium is deducted through payroll and applied accordingly.
The Toronto Board of Trade’s 2012 Benefits and Employment Practices Survey revealed that 53.6% of employers are taking advantage of non-taxable LTD benefits by having the premium paid fully by employees. This is reflective of an upward trend in cost sharing, as only 48% of LTD plans were employee-paid in 2007.
Payroll deduction is an effective method for managing your employee benefits while maintaining control over costs.
Check out part two in this blog series, where we will explain the value of Co-Insurance as a benefits plan cost sharing option.
The Benefits Trust helps employers build a better benefits plan than they can get anywhere else. Contact us today.
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