Rising benefits costs: why Canadian employers refuse to cut coverage

Canadian employers are staring down a widening gap between inflation and the cost of group benefits – and the overwhelming majority are choosing to absorb the difference rather than reduce coverage or pass the burden to employees, according to a recent study. 

The 2026 Global Benefits Forecast by MBWL International and Normandin Beaudry found that cost control is the primary focus for 64 per cent of global organizations this year, while nearly half say controlling benefits costs is their biggest challenge – driven by rising healthcare inflation, economic uncertainty, and constrained internal resources. Yet despite those pressures, a separate 2025 global benefits attitudes survey by Normandin Beaudry found that only two per cent of Canadian employers are considering cutting benefits outright. 

One of the big challenges around benefits for organizations is that costs are increasing more rapidly than the inflation rate, according to Daniel Drolet, Senior Partner, Health and Benefits at Normandin Beaudry in Montreal. "We just released our latest salary increase trends and it's around three, 3.1 per cent, but benefits right now is trending at double that – six or seven per cent overall," says Drolet. "Overall health, including dental, is around 10 per cent, so there's a discrepancy and it's a complex one to explain why it's not aligned with consumer price index or other cost measures." 

With salary increases tracking around Canada's Consumer Price Index – which in May 2026 was 3.2 per cent year over year, according to Statistics Canada – HR leaders are caught between employee expectations and finance team scrutiny. "When you come up with a 10-to-12-per-cent increase, the first thing they think is, 'We can't ask employees to pay 10 to 12 per cent more,'" says Drolet. "And at the same time they struggle with, 'I can't pay more, what do we do with the plan?' It's a complex situation we're facing right now." 

Cost pressure is increasing, but cuts aren't the answer for many 

Despite the cost squeeze, Drolet says the approach to benefits has shifted meaningfully from previous cycles. During the high-inflation periods of the 1990s and again after the 2008 financial crisis, benefit cuts were common – but that calculus has changed. 

"Right now there's some pressure, but employers are still focusing on what they can do for employees," says Drolet. "I don't want to increase the employee contribution or copays too much and transfer costs to employees – because when you manage costs and you push them to employees, you're not managing them, it's just displacement of cost." 

According to the MBWL survey, only 17 per cent of global employers are considering increasing the employee share of costs, while 40 per cent are prioritizing improved governance of benefits and 36 per cent are focusing on automating administrative processes. 

The harder challenge is specialty drugs. New medications – some used to treat rare diseases – can cost upwards of half a million dollars per year, and unlike a life insurance claim, these are pay-as-you-go commitments that can span decades and create unpredictable long-term liability for organizations. "It's really the biggest risk we've ever faced in group benefits," says Drolet. "It's life changing, but someone has to pay at the end of the day." 

Pressure on the public healthcare system has also raised employee expectations. "Finding a family doctor and having access to care is harder, and employees believe that if the government isn't able to provide through the public system, the employer should cover that gap," says Drolet. "But this accessibility is mostly given by the private sector, and this has brought some great new coverage in plans, but the overall costs are higher than they were before." 

Smarter management, not blunter cuts 

For organizations looking to reduce benefits spend without gutting coverage, Drolet suggests a data-first approach – examining claims by category and matching interventions to actual utilization patterns rather than making blanket reductions. The conversation between HR and finance has shifted accordingly, with finance increasingly focused on return on investment and the role of predictive analysis in understanding the downstream cost of cutting coverage. 

Switching carriers is one underused lever. "Not all benefits providers are equal – they look similar from the outside, but the way they manage drugs, and the sophistication of their system – some of them can go really far and do a really, really good job," says Drolet. "Sometimes switching from one carrier can actually result in better management of costs and making sure employees are taking the right drugs at the lower cost." 

He also points to the hidden cost of manual HR administration. Automating the connection between human resources information systems, payroll, and carrier data removes friction and generates savings that rarely appear on a premium invoice. "HR functions can do more with fewer people if we can reach that bar," says Drolet. "Disability management isn't labour-intensive on the employer side – that's a real cost they're saving – and we never factor that in when we look at the overall cost of the plan." 

The legal and turnover risk of getting benefits cost control wrong 

Oren Barbalat, an employment lawyer at Littler in Toronto, says organizations can expose themselves to serious liability when cost-cutting decisions intersect with termination. The most common mistake is cancelling coverage too early, according to Barbalat. 

"If an employee becomes disabled after termination [during the legal notice period], and the insurer says there's no coverage because it was cancelled, the employer would effectively become the insurer and be on the hook for the underlying benefits," Barbalat says. "Whereas if the company just continued to pay the premiums, it would be limited to the cost of the premium." 

Even contractual language giving employers discretion to change benefits can face court scrutiny. "It's something that happens usually not because anyone is trying to do anything nefarious, but because they don't know or maybe they're not paying specific attention to individuals who might have different needs in their various risk profiles," says Barbalat. 

There are recruitment implications too. Recent data indicates replacing a single employee can cost more than $30,000 – a figure that can quickly dwarf any premium savings from a benefits rollback. "If we're cutting benefits that other organizations aren't cutting, what are we signalling in the market?" says Barbalat. "Are we saving or are we kind of cutting our nose to spite our face by saving some money on the front end but then building a culture where it's a stopgap type of role?" 

Data, communication, and the long view 

The smartest route through rising cost pressures requires better data, clearer communication with employees, and a total-cost view that accounts for disability, absenteeism, and turnover alongside premium spend. 

"Hope is never a good strategy, so hoping that we won't reach the level where they start cutting benefits isn't enough," says Drolet.