11 February 1997 Internal T.I. 9633967 - HEALTH WELFARE TRUST -ASO ARRANGEMENT FOR LIFE INSURANCE

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:

whether a particular arrangement to provide benefits to employees involves a policy of insurance or an ASO arrangement

-secondary issue involves the use of an ASO arrangement to provide "life insurance" to employees

Position:

question of fact as to whether a policy but on the secondary issue, the 6(1)(a) exemption for group term life insurance policies does not extend to an ASO arrangement -as a result, a health and welfare trust which self-insures such benefits will not be accorded the treatment in IT-85R2 and will be treated as an employee benefit plan, unless the trustees account for the contributions, income and dispersements of the non-qualifying portion separately from the portion which does qualify for the treatment in it-85R2

			February 11, 1997

	TORONTO NORTH TAX SERVICES OFFICE	Headquarters
	Audit 442-4-1		A. Humenuk
	12th Floor		957-8953

Attention: Claira Mark
963396

XXXXXXXXXX Health & Welfare Trust

We are replying to your memorandum of October 7, 1996, in which you ask whether various documents governing the liability of XXXXXXXXXX represents contracts of insurance or administrative services only (ASO) contracts.

As discussed on January 17, 1997 (Mark\Humenuk), the determination of whether there is a contract of insurance involves a finding of fact which is an audit issue. We understand that the establishment of the facts has been made more difficult by the lack of documentation in respect of the arrangement between the insurance company and the trust. However, since the matter appears to have already been resolved by negotiation for the taxation years under review, it would appear that no further action is required. If the issue is revisited in a subsequent audit, you may wish to consult with the audit industry specialist for insurance, currently Duncan McKay of the Toronto East Tax Services Office. Once you have determined whether the benefits are provided through insurance policies or ASO contracts, we would be pleased to provide technical assistance as to the tax consequences that flow from such a determination.

We note that the former industry specialist for insurance, John Lorimer, in his memorandum to you of June 8, 1995, offered the opinion that group policy XXXXXXXXXX was not a contract of insurance for the XXXXXXXXXX calendar year because he felt that the Trust was bearing the risk on an annual basis. It should be noted that the benefit to employees from employer-provided life insurance coverage, unlike other benefits which may be provided under a health and welfare trust, is included in income under paragraph 6(1)(a) of the Act when it is not provided under a group term life insurance policy as defined in subsection 248(1) of the Act. When the benefit from an employer's contribution to a plan to provide life insurance is included in the employee's income under paragraph 6(1)(a) (instead of under subsection 6(4) of the Act), as is the case when the coverage is provided through an ASO arrangement, the plan generally falls within the definition of an employee benefit plan in subsection 248(1) of the Act because none of the statutory exclusions apply. Since an ASO arrangement does not involve a policy of insurance, it does not fall within the definition of a group term life insurance policy in subsection 248(1) of the Act, with the result that an ASO arrangement to provide benefits to the dependants of a deceased employee typically qualifies as an employee benefit plan.

As stated in paragraph 4 of Interpretation Bulletin IT-85R2, a trust which provides benefits other than those listed in paragraph 1 of that bulletin will be treated as an employee benefit plan (or employee trust, if applicable) unless the contributions, income and disbursements for the part of the plan that is described in paragraph 1(a) to (d) is accounted for separately from the part of the plan that is an employee benefit plan. Consequently, if the group term life insurance policy was, in fact, cancelled in XXXXXXXXXX and an ASO arrangement substituted for it, no amount is included in the employees' income under subsection 6(4) of the Act in respect the substituted arrangement. Furthermore, because of paragraph 18(1)(o) of the Act, no deduction is permitted to the employer for contributions made to the health and welfare trust in respect of the substituted arrangement except to the extent provided by subsection 32.1(1) of the Act.

We are returning the copy of the XXXXXXXXXX audit report which you submitted with your request.

John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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