20 October 1995 External T.I. 9526415 - VALUATION OF NON-QUALIF EMPLOYEE INSURANCE BENEFIT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

timing and calculation of the employee's benefit from a plan of insurance which is not exempt under 6(1)(a)

Position TAKEN:

if the insurance policy is not an ASO arrangement & is not the property of an EBP, then the annual benefit is the amount of premium paid on behalf of the employee but in the case of an ASO arrangement or a self-insured arrangement, there is no premium which vests with a particular employee & the amount to be included in the employee's income is the value of any reimbursements out of the employee benefit plan. -employer's deduction is generally restricted to the amount which has been included in the employee's income

Reasons FOR POSITION TAKEN:

in a self-insured or ASO arrangement, no amount vests with the employee even though the plan administrator has calculated the employer's contribution based on the projected expenses which will be reimbursed to that particular employee

A. Humenuk

XXXXXXXXXX 952641

Attention: XXXXXXXXXX

October 20, 1995

Dear Sirs:

Re: Employer Sponsored Benefit Plans

We are replying to your letter of April 10, 1995 concerning group insurance benefits provided to employees which are not exempt from taxation by reason of paragraph 6(1)(a) of the Act. We apologize for the delay in our response.

While paragraph 6(1)(a) of the Act exempts certain types of employee benefits derived from a plan of insurance from employment income, a benefit received under any other type of insurance arrangement would ordinarily be included in the employee's income as either a benefit from employment or a benefit received out of an employee benefit plan. Your question relates to the calculation and timing of such benefits. In your view the benefit should be the value of the insurance premium paid on behalf of the employee or, in the case of a self-insured arrangement or an administrative services only arrangement, the imputed or phantom rate established by the plan administrator to determine the amount of contributions required of the employer.

If an employer holds an insurance policy as a trustee or custodian, the arrangement will be considered an employee benefit plan where the conditions for an employee benefit plan are met. Paragraph 5 of Interpretation Bulletin IT-502 discusses the circumstance under which an employer may be acting as a trustee. If the policy is held by a trustee as property of an employee benefit plan, the amount to be included in an employee's income is the amount received by the employee out of the plan.

Where an employer holds the policy in its own capacity and pays the premiums on behalf of the employee, the value of the benefit to be included in the employee's income under paragraph 6(1)(a) of the Act in respect of such insurance coverage would ordinarily be the amount of premium paid under the policy in respect of such coverage.

An exception to the previously mentioned comments may occur where a policy with an insurer is, in fact, an administration contract under which the insurer is providing services to the employer as a custodian or trustee. Where this is the case, the contract itself may be an employee benefit plan and any amount received by the employee out of the plan will be included in income under paragraph 6(1)(g) of the Act.

Similarly, where an employer "self-insures" its commitment to reimburse employees for certain expenses by creating a fund from which the reimbursements can be made, the arrangement will likely be an employee benefit plan. It should be noted that the employer's deduction for a contribution to an employee benefit plan is limited to the amount that has been allocated to the employer by the custodian and that the amount so allocated cannot exceed the amount that has been paid out of the plan for the benefit of the employees.

A self-insured arrangement or administrative service contract with an insurer would not normally qualify as an employee trust since no amount vests with the employee at the time of the employer's contribution is made. Consequently, there is no provision under which a pro-rata portion of the employer's contribution to such an arrangement can be included in the income of the employees who may become entitled to payments out of the plan.

In the case of an arrangement to reimburse employees for the cost of medical or dental expenses of a non-qualifying dependent as administered under an administrative services only contract or a self-insured arrangement, the amount of the benefit will be the amount paid to the employee as a reimbursement. However, where the employer pays the premium on an insurance policy for medical or dental coverage for a non-qualifying dependant on behalf of the employee, the benefit to be included in the employee's income is the value of that coverage provided that the insurance policy is not the property of an employee benefit plan.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch