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:

What is the impact of a change in the funding of contributions for a wage-loss replacement plan?

Position:

Question of fact; depends on who has the contractual obligation to pay the premiums.

Reasons:

Paragraph 6(1)(f) and IT-428

XXXXXXXXXX 	2001-008104
		Randy Hewlett, B.Comm.
September 5, 2001

Dear XXXXXXXXXX:

Re: Wage Loss Replacement Plans
Paragraph 6(1)(f) of the Income Tax Act

We are writing in response to your letter dated April 12, 2001, wherein you requested a ruling on a matter involving an employer sponsored "group insurance program" (the program). The issue involves a change in the funding of premiums paid to an insurer for the long-term disability (LTD) plan portion of the program. The issue is summarized below and our comments follow.

Background

The program you describe in your letter includes "group life, dependent life, accidental death and dismemberment, supplementary health and long term disability (LTD) insurance." You indicate that the premiums are shared equally between the employer and employees. The employee portion funds 100% of the LTD plan premium. The remainder of the employee contribution is then applied to the group life insurance plan premium.

The group life and health benefits derived from the program are underwritten on an "experience rated, refund accounting basis, whereby the claims and expenses are deducted from the premiums paid". Under this method, if there is a surplus for this plan, after the rate stabilization fund (RSF) requirement has been met, it is deposited in a refund deposit account (RDA) "to be used at the employer's discretion". In addition, you indicate that the group life and health benefits are "cross-experience rated, allowing a surplus under one to be applied against a deficit under the other". At present, for this plan there is a fully funded RSF and approximately $XXXXXXXXXX in the RDA, attributable "mostly to the group life benefit".

The plan relating to LTD is "underwritten on a two-year experience rated basis, whereby the first two years of a claim are underwritten on an experience rated, refund accounting basis and the balance is charged to the underwriter's pooled business. The premiums are divided accordingly." You indicate that the LTD plan is in a deficit position of $XXXXXXXXXX and the RSF has a zero balance, while the RDA has $XXXXXXXXXX that was established when the RSF was fully funded. The RDA can "only be withdrawn on the policyholder's authorization".

Upon renewal of the program this year, the insurer requested a XXXXXXXXXX% increase in the LTD plan premium, including XXXXXXXXXX% "for deficit recovery". The employer has decided to reduce the burden that this premium increase would place on employees by transferring $XXXXXXXXXX from the LTD plan RDA and $XXXXXXXXXX from the group life and health benefit plan RDA, thereby only having to increase the employee premium by XXXXXXXXXX%.

The group life and health benefit plan RDA was funded from employee and employer premiums. However, you indicate that "it could easily be demonstrated that the amount in question, $XXXXXXXXXX, (and more) came from employee contributions". As a result, in your view the LTD plan would not be affected in terms of the taxability of benefits received by employees. In your insurer's view, however, there could be an impact because the group life and health benefit plan RDA is partially funded by employer paid premiums.

You request that we make a ruling on whether an amount withdrawn from the group life and health benefit plan RDA, and applied to the deficit of the LTD plan, will affect the taxability of benefits received by employees from the LTD plan.

Our Comments

The situation presented appears to be an actual fact situation involving completed or ongoing transactions. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The income treatment of disability plan benefits is discussed in Interpretation Bulletin IT-428, Wage Loss Replacement Plans. Paragraph 6(1)(f) of the Act provides that amounts received on a periodic basis by a taxpayer as compensation for loss of income from an office or employment, that were payable under a sickness, accident, disability or income maintenance insurance plan (i.e. wage loss replacement plan) to which the employer made a contribution, are to be included in income, but subject to a reduction for contributions made to the plan by the employee.

A wage loss replacement plan in which employees pay all of the premiums is referred to as an "employee-pay-all plan". Benefits received from an employee-pay-all plan are not included in computing taxable income of the recipient. Paragraphs 16 through 21 of IT-428 discuss employee-pay-all plans. As stated in paragraph 17 of IT-428, whether or not a particular wage loss replacement plan is an employee-pay-all plan is a question of fact and that the onus is on the employer to prove that such a plan exists.

Where an employer has a plan that is in part a wage loss replacement plan and in part a plan that provides for other types of benefits, the employer must be prepared to identify that part of any premiums paid to each type of benefit included in the plan and, similarly, the part of the employees' contributions, if any, that relate to the wage loss replacement part of the plan. This information is required to determine whether the wage loss replacement plan is one to which the employer has contributed, and the relevant amount of an employee's contribution.

The existence of an employee-pay-all plan is determined by ascertaining who is contractually obligated to pay the premiums under the plan. This determination can only be made after a review of the plan documents. In regard to the particular situation described in your letter, it is not possible to determine who may have the legal obligation for paying the premiums in respect of the LTD portion of the plan without a review of relevant documentation. However, if the plan were an employee-pay all plan prior to the change in funding contemplated, in our view such a modification would taint the status of the plan as an employee-pay-all plan, thereby making any benefits received under the plan taxable pursuant to paragraph 6(1)(f) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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