HR Benefits for Small Businesses - Look Beyond the Salary Bottom Line [Part 2]
By Michelle Collins | October 31, 2001
Employer-paid versus employee-paid plans
"It would be typical even in the small case market for an employer to pay 50 or more per cent of the total premium cost of the group program," adds Marie Currell, an associate with William M. Mercer in Toronto, ON.
Many employers opt for a simple group plan and give employees the option of adding on extras, such as long-term disability insurance, on an individual basis. This allows employees to opt out of extra coverage if they already have these benefits or don't think they need them. It also lets the business cover the basics, while employees share the cost of extra options.
If you opt for an employer-paid plan, your employees will enjoy having benefits without the extra cost of paying for them, and you can write the premium costs off in your taxes, explains O'Hanlon. Yet the advantage of having employees share in the cost is that the strain on your budget won't be so overwhelming.
You also need to plan for the possibility of premium increases, as heavy users of the plan will also drive up the costs year after year. Once the plan is in place, it becomes difficult to reduce benefits or ask employees to pay a greater portion of the costs.
Smart Tip: If your employees, not the employer, pay for long-term disability coverage, the benefits will be tax-free should they ever need to collect. As soon as the employer pays for a portion of long-term disability benefits, any benefits collected will be subject to income tax deductions.
Plans for small businesses: where can I get one?
After you have analyzed your needs and determined how much you can afford to pay, it is time to start shopping for a plan.
You now have two options: you can approach insurance companies on your own, or you can hire a human resources benefits consultant, who will be paid through a commission from the insurance company. Currell explains that each company has its own set of rules: one may deal directly with you, another may insist on using a broker. You also need to spend some time looking for an insurer that has benefits plans for companies with fewer than 50 employees.
Remember that as a small business, your choice of plans and options will be limited. While you don't have to choose a standard, off-the-shelf package, you will find that you have little control over rates and maximum coverage, says O'Hanlon.
To cut costs and expand your options, look for group plans offered through business associations such as the local Chamber of Commerce or Board of Trade. You could also try calling an insurance company in your area as they usually have an agent who deals with small groups. If you decide that you would like to deal with a consultant, ask for a referral or look in the Yellow Pages (www.yellowpages.ca).
Smart Tip: Get several quotes before making a final decision.
Tax and legal considerations
Both employers and employees can get tax breaks when it comes to health plans. An employer can write off the benefits on their taxes, and employees don't have to pay for coverage with after-tax dollars.
"The taxation varies from plan to plan. Generally there are tax-effective ways of providing the benefit or compensation. It's much more tax effective than just straight additional salary for employees," adds Linda O'Hanlon, president of Home Run Benefits Consulting Ltd in Calgary, AB.
If you want to take advantage of the tax benefits of insurance but don't want to pay for coverage that you don't use, you should investigate cost-plus plans. Essentially, with a cost-plus plan you pay for the services you actually use, such as dental or eye care costs, through a third party who sets up a system that enables you to deduct these expenses at year-end. For their services, the third party will charge your business an administrative fee from 5 per cent to 15 per cent, plus applicable taxes, and may have an initial set-up fee. The ultimate benefit of the cost-plus plan is that your company gets to deduct the cost of health and medical services so they don't come from after-tax income. This type of plan can be very costly as you add staff, however, so it is best suited to the smaller, owner-operated company.
From the legal standpoint, you have both human rights and record-keeping obligations. If access to your plan discriminates against an employee, you may find yourself in trouble with the very people you want to keep happy. You must also keep the proper accounting records.
"The main thing is the human rights and making sure that access and coverage is fair," says O'Hanlon.
Making the final decision
So you've decided getting a plan is a good investment for you. Now what? It's time to review the costs and the expected benefits. Are your employees really going to be better, more contented workers? Will you as the employer see the return on your investment? Be careful not to bite off more than you can chew, as scaling back at a later date could send your employees looking for greener pastures.
Communicating the plan
Once you sign on the dotted line and get set up, you need to tell your employees what they are entitled to, although chances are you have probably already talked to your staff about what kinds of benefits they think they need. If you decided to use a consultant, they can help you do this, or even the insurance representative may help you explain the finer points of the plan to your employees.
"Typically, you would want one of the values a consultant would add would be to monitor your program, going forward and determining whether it was a good fit and to make appropriate plan changes as required," says Marie Currell, an associate with William M. Mercer in Toronto, ON.
As your employees change so will your plan, and Currell explains that you can usually make changes to your plan at any time and even switch providers with 30 days notice. With good preparation you should be able to come up with a plan that suits everybody's needs.
Part I: Introduction, Types of Plans