Flexible benefit plans, cafeteria plans, and flex plans are becoming increasingly popular for Canadian employers to structure employee benefits packages.
Flexible benefit plans provide a win-win situation for both employers and employees. While employers can contain costs while still providing attractive benefits, employees get more choices when customizing a plan that fits their lifestyle.
Our guide will give everything Canadian employers need to know about setting up and managing a flexible benefits plan.
What is a Flexible Benefits Plan?
A flexible benefits plan, sometimes called a cafeteria plan, is an employee benefit program that allows workers to customize their benefits package by choosing from a menu of options.
The employer selects a standard benefits package for all employees in a traditional benefits plan. This usually includes health and dental coverage, group life insurance, retirement savings plans, and paid time off.
With a flexible plan, the employer still chooses which benefits to make available. Still, employees can choose which benefits they want up to a specified allowance or number of credits.
For example, an employer provides $5,000 in flex credits. Employees can use those credits to buy enhanced medical and dental coverage, contribute to a spousal life insurance policy, and allocate the rest to retirement savings.
Employees get to tailor benefits to their needs instead of a one-size-fits-all approach.
Key Features of Flexible Benefits Plans
Flexible benefits plans let employees choose the benefits that work best for them. Here are the main features that make these plans easy to adjust and useful.
- Menu of benefit options: Employers select a range of benefits such as health/dental insurance, retirement plans, group life insurance, disability coverage, time off, tuition reimbursement, etc.
- Employee choice: Workers can choose benefits from the menu up to a specified allowance or number of credits.
- Customization: Employees can build customized packages based on individual needs and preferences.
- Employer caps spending: Total spending is contained by setting a defined contribution limit or credit allowance.
- Rules and regulations: Flex plans must comply with CRA and tax rules to provide tax-advantaged benefits.
- Administration requirements: Technology and HR must manage enrollment, selections, compliance, and reporting.
- Communication: HR must communicate plan details, selections required, changes in offerings, etc.
Advantages of Flexible Benefits Plans in Canada
Implementing a flexible benefits plan offers many advantages, including:
Benefits alignment
With a traditional plan, employers risk providing benefits that don’t match employees’ needs and priorities. Flexible plans allow workers to align benefits with their lifestyle, health status, family situation, and financial position.
Enhanced recruitment and retention
Prospective hires are attracted by organizations offering choices in benefits selection. Flex plans have been shown to increase employee loyalty.
Reduced waste
Employers should avoid spending money on benefits employees won’t use with a one-size-fits-all package. Flex plans eliminate benefit offerings that don’t provide value.
Contained costs
Employers fix costs by defining a set contribution level. Maximum spending is predictable for better budgeting.
Increased appreciation
Choice in benefits selection gives employees a greater sense of control. Workers feel their needs are being considered when given flexibility.
Improved experience
Technology allows employees to access user-friendly platforms to make benefit selections and modifications. The customized experience increases engagement.
Ease of change
Offerings can be modified annually to keep up with trends and changing regulations. Employees also regularly reevaluate selections.
Disadvantages of Flexible Benefits Plans in Canada
While flexible benefit plans provide many advantages, there are some potential drawbacks to consider as well:
| Higher administration costs | More complex administration is required to manage enrollment, employee selections, compliance, reporting, and technology systems. This increases costs compared to traditional plans. |
| Regulatory considerations | Administrators must ensure the plan complies with CRA rules and Section 125 of the Income Tax Act to provide tax-free benefits. This requires expertise. |
| Technology requirements | Specialized software, online platforms and management systems are needed to handle employee communication, benefit selections, payroll integration, reporting and compliance. |
| HR communication challenge | HR must communicate plan details, employee selections required, and any changes in benefit offerings from year to year. This is imperative for success. |
| Difficulty containing costs | Although costs are capped through flex credits, if too many rich benefits are offered, overall spending could exceed targets, and employees may opt for more expensive choices. |
| Adverse selection | Employees tend to select benefits they think they’ll need, and the mix of options could end up being more expensive than a standard package. |
| Staff satisfaction risks | Employees accustomed to choice could become disenchanted if the flex plan is later changed or cancelled. Employers must be committed long term. |
Who is Best Suited for a Flexible Benefits Plan?
The following types of companies and organizations can benefit the most from implementing flexible benefit plans:
- Medium to large employers: Usually, 50+ employees must provide a robust menu of benefit choices and achieve cost efficiencies.
- Younger workforces: Millennials and Gen Z value benefit personalization and flexibility. Choice boosts attraction and retention.
- Technology companies: Younger tech employees do not want a “one-size-fits-all” benefits program. Customization matches their mindset.
- Professional services firms: Knowledge workers and creatives prefer choices that support their lifestyles.
- Female-dominated workforces: Flex plans allow customization for diversity of needs and more excellent work-life balance.
- Multi-generational organizations: Wide ranges of age and life stage in the workplace make flexible benefits a better fit than rigid packages.
- Companies in competitive talent markets: Flexibility is a strategy to stand out and beat other employers vying for skilled staff.
- Businesses with remote staff: Widely dispersed workforces benefit from choice rather than standard benefits.
- Companies with a concentration of high earners: Higher-paid employees desire benefits that match their status.
- Startups seeking talent: New companies use flexible benefits to compete with more established firms.
- Fast-growing enterprises: Rapid employee expansion makes catering to everyone’s needs and wants difficult.
- Businesses with high turnover: Flexibility in benefits helps retain employees long term.
Which Benefits Should Be Included in a Flex Plan?
Employers have extensive options for choosing which benefits to make available in a flexible plan. No set list is required, so companies can get creative with their mix of traditional and nontraditional benefits.
Here are some of the more common benefits offered in flexible plans:
Core Health Benefits
- Group health insurance (prescription drugs, paramedical coverage, vision and travel benefits)
- Dental plans (basic, major restorative, orthodontics)
- Employee assistance programs
- Telemedicine services
Insurance Protection
- Basic life and AD&D insurance
- Optional life insurance (for employee, spouse, dependents)
- Short-term Disability Insurance and Long-term Disability Insurance
- Group critical illness insurance
- Accident insurance
Financial Security
- Retirement savings plans (RRSPs, Defined Contribution Pension Plans)
- Tuition and education assistance
- Stock purchase plans
- Flexible spending accounts (for health care, dependent care etc.)
Work-Life Balance
- Additional vacation time
- Personal days (sick days, floating holidays)
- Child care support
- Fitness memberships/reimbursement
- Commuting expense coverage
When designing their flex plans, employers must conduct due diligence in assessing employee needs, looking at competitive offerings, modelling costs, and determining which benefits provide the most value to attract, retain and engage staff.
Managing and Communicating a Flexible Benefits Plan
Managing a flexible benefits plan brings additional complexity compared to traditional programs. Effective administration and communication are crucial to success.
Administrative elements that must be handled include:
- Determining flex credits or allowances
- Selecting and contracting with benefit carriers/vendors
- Developing administrative processes and documents
- Reviewing compliance with regulations
- Managing technology platforms for benefit selection and data
- Coordinating annual open enrollments
- Processing new hire enrollments
- Handling mid-year enrollment changes
- Providing ongoing employee communications
- Issuing personalized benefit statements
- Generating executive reporting and analysis
- Paying premiums and reconciling billing
- Staying current on legislation impacting flex plans
Employers must decide whether to handle administration in-house or contract with an external benefits administrator or consultant. Outsourcing flex plan administration ensures expert management and reduces pressure on internal HR staff.
Ongoing communication is also imperative. Employees must understand how the flex plan works, the options available, how to make selections, and processes for changing benefits.
FAQs related to flexible benefits plans in Canada
When should employers in Canada implement flexible benefits?
The best time for Canadian employers to implement or change flexible benefit plans is during open enrollment, typically in late fall. This allows adequate time for employees to understand their options and make selections before the new plan year starts.
Who is eligible for flexible benefit plans in Canada?
Eligibility varies by employer but often includes all full-time permanent employees. Some plans allow part-time, contract, seasonal, or remote employees to participate. Unionized workplaces may have different eligibility standards outlined in collective agreements.
Why do Canadian companies offer flexible benefits plans?
Flexible plans allow employees to customize benefits based on individual needs, increasing satisfaction and retention. They help attract talent by providing choices based on life stage. Flexible plans can also provide tax advantages for employers and employees when certain options are funded pre-tax.
Are flexible benefit accounts taxable in Canada?
Some flexible benefits like health spending accounts can be funded using pre-tax dollars, reducing taxable income. Benefits paid out as taxable cash to employees are subject to tax. Employees should consult a tax advisor regarding their particular situation.