Hiring Across the 49th Parallel: Traps for the Unwary for Cross-Border US-Canada Hires (Part II)

The United States and Canada are each other’s largest trade partners with nearly C$3.6 billion/US$2.7 billion worth of goods and services crossing the border each day in 2023.  The United States is the single greatest investor in Canada and Canada was the largest source of foreign direct investment in the United States at the end of 2022. [1]  As commerce in general and employee mobility in particular increases, employers with operations in the United States and Canada may consider a “one-size-fits all” approach to employment, benefits and compensation arrangements. However, despite many similarities, employers should take heed of possible discrepancies across the two countries’ employment landscapes. In this Part II of our series on cross-border hiring, we discuss health benefits and retirement benefits.

In Part I, which you can find here, we discussed governing law, termination, and classification issues. 

Health Benefits

In the US, health insurance is generally not publicly-provided (the major exceptions being for low-income families and the elderly), so employer sponsored health insurance can often be a substantial benefit to employees.  Employers often provide health insurance to employees and dependents, and employers usually share a portion, and in some cases all, of the cost.  Under the Affordable Care Act (the “ACA”), large employers may be subject to penalties for failure to offer minimum essential coverage to full-time employees and their dependents or for offering coverage that is not affordable or does not offer minimum value (meaning coverage of at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan). Large employers are also required to file information with the Internal Revenue Service on an annual basis to report the health coverage they provide to full-time employees and demonstrate their compliance under the ACA.  An employer is considered large if in the prior calendar year it had, on average, at least 50 full-time (or full-time equivalent) employees.  Employers who are not considered large may be eligible for a small business health care tax credit.  Employers who adopt a cafeteria plan under Section 125 of the US tax code allow employees to pay for their benefits on a pre-tax basis through a reduction in the employees’ salary.  As previously noted, employer sponsored health benefits can be a substantial benefit to employees due to the cost of private health insurance.  Employers, however, should be aware that such plans and their administration must comply with complex rules, such as those set forth under the ACA and the Employee Retirement Income Security Act of 1974 (“ERISA”).  

Healthcare in Canada is largely publicly provided, and employers are not required to arrange health insurance for their employees. However, many employers choose to provide supplemental group health insurance to employees and their dependents to cover a portion or the full cost of healthcare that is not offered through the applicable province’s public system, such as prescription drugs, dental care, and corrective eyewear to the extent not covered by public healthcare.  These benefits are typically provided by a third-party insurance provider who, in exchange for premium payments, will process claims from participating employees and will either inform the employer of the disbursements it needs to make in respect of claims (known as “administrative services only” or “ASO” arrangements) or, more frequently, will assume responsibility for paying out claims (known as “fully insured” arrangements). Employers who enter into an ASO arrangement may maintain stop-loss insurance in respect of the benefits plan so that they are protected from unexpectedly high claims costs. Employees will often pay a portion of the premiums for employee health benefits coverage via payroll deduction or, less frequently, pay the full costs of such supplemental benefits. Supplemental group health insurance plans are often bundled with life, accidental death and dismemberment, and disability insurance. Prospective employees may consider the supplemental health benefits and other benefits an employer provides when choosing whether to apply to or accept a job offer from that employer and so employers will often compare their offerings to those of their competitors to ensure that they are offering competitive benefits. Upon termination of employment, employees who are entitled to common law reasonable notice are generally entitled to continued benefits coverage during the common law reasonable notice period. In Ontario, employees are similarly entitled to benefits continuation during the applicable statutory notice period, including where pay is provided in lieu of that notice, in accordance with minimum employment standards legislation.

Retirement Benefits

In the US, employers typically offer full-time employees participation in a tax-qualified defined contribution plan, in which employees and employers are allowed to contribute to a tax deferred investment account.  Defined benefit plans, in which employers promise to pay a certain annual benefit on retirement, have become less common in the US.  Unionized employers are most likely to contribute to a defined benefit plan, many of which are sponsored by the union itself. We note for the sake of completeness that there are other, more specialized retirement savings vehicles in the US, but those are outside the scope of this article.  In a defined contribution plan, such as a 401(k) plan, 403(b) plan or their governmental-entity counterparts, employees contribute a portion of their pre-tax salary (up to an annually adjusted statutory limit) into an individual investment account.  Investments are selected by the participating employee.  Any gains from such accounts grow tax-deferred (such gains are therefore not guaranteed), and employees pay ordinary income taxes when they receive distributions from the plan.  An employer that contributes to a defined contribution plan may take a tax deduction, up to a statutory limit, on such contributions for the taxable year in respect of which such contributions are made (provided such contributions are made no later than the timely filing of the return in respect of such taxable year.  Defined contribution plans offer significant tax advantages, but the plans and their administrators must comply with complex rules set forth in the US tax code and ERISA regarding funding, investment alternatives, investment advice, non-discrimination, fiduciary duties and several other categories.

Retirees in Canada may receive public retirement benefits via the Canada Pension Plan or the Québec Pension Plan, Old Age Security, and/or Guaranteed Income Supplement programs. For most retirees, these public programs need to be supplemented by personal savings and investments in order to secure sufficient retirement income.  As a result, many employers in Canada provide retirement savings benefits to their employees as part of their employment benefits packages.  Employers may choose to provide a defined contribution, defined benefit (which have become less common in Canada), or other pension plan which, if registered, is afforded favorable tax treatment. Federal income tax legislation also provides for a variety of registered tax-sheltered and tax-deferred savings vehicles that employees can make use of, such as “tax free savings accounts” (or “TFSAs”) and “registered retirement savings plans” (or “RRSPs”), and employers can arrange for a third-party group plan provider to facilitate employee investment into these vehicles often with competitive management fees.  Employers can make contributions to these plans for the employees’ benefit and will often offer to match employees’ voluntary plan contributions up to defined limits.  Non-registered savings vehicles, such as a supplemental executive retirement plan, are occasionally provided for high-income and executive employees whose retirement benefits would otherwise be restricted by annual contribution limits imposed on registered plans by applicable laws.  Employers who choose to provide retirement benefits – in whichever form – should ensure they are compliant with and aware of the pension, tax, payroll, reporting, and related rules, regulations and laws pertaining to them. Fines, penalties, adverse tax consequences, employee claims, and other negative outcomes can result if an employer fails to comply with its obligations regarding employee retirement benefits in Canada.

Conclusion

Legal differences in the United States and Canada require distinct approaches to health benefits and retirement benefits in each jurisdiction.  Mintz can assist you in complying with employment and benefits laws in both the United States and Canada.  Please contact Mintz’s Employment Practice if you are considering hiring someone across the border, have questions or concerns about your existing cross-border workforce, and/or are working for (or considering working for) a cross-border employer.
 

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