20 May 1994 External T.I. 9403365 - HEALTH AND WELFARE TRUSTS AND SELF-ADMINISTERED PLANS

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:

Does a change in the funding arrangement for PHSP benefits from third party insured to self-insurance create any tax consequences?

Position TAKEN:

The change in funding arrangements, in and of itself, will not affect the status of the PHSP and the non-taxability of benefits paid out of such a plan.

Reasons FOR POSITION TAKEN:

As long as the essential elements of the plan remain unchanged and the self-funding arrangement is done on an actuarial basis similar to the manner in which insurance premiums are determined there should be no impact.

		940336
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

May 20, 1994

Dear Sirs:

Re: Self-Insurance - Health and Welfare Trusts

This is in reply to your letter of February 4, 1994 concerning the administration of a private health services plan by a health and welfare trust.

In the following comments unless otherwise stated, all references to statute are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the Act).

The Department's general position on health and welfare (H & W) trusts is set out in Interpretation Bulletin IT-85R2. A reference below to a H & W trust is a trust that is described in that bulletin.

You are concerned with the type of situation where employees of a number of employers are entitled to benefits under a private health services plan (PHSP) pursuant to a collective agreement. For the purposes of administering the PHSP, a multi-employer H & W trust has been established. At the present time, the administration of the PHSP involves a contract of insurance with an insurance company. However the H & W trust wishes to administer the PHSP on a self-insured basis by entering into an administrative services contract with a third party administrator. However, the plan itself would essentially remain unchanged.

With respect to the above type of situation where the funding arrangement is changed to self-insurance, the trustees, normally in consultation with an actuary, will determine, on an actuarial basis having regard to actual experience, the level of contributions required to be made to the H & W trust fund in order to adequately fund the benefits made under the PHSP and will advise the employers accordingly. Payment of claims would be made by the trustees from the trust fund by cheques drawn upon a bank account or accounts maintained by the trustees for the purposes of receiving contributions from the employer and payment of such claims. These cheques could be signed by the third party administrator as the trustees' agent.

In these types of circumstances, it is our view that the change in the funding arrangement will not, in and by itself, affect the status of the PHSP and the non-taxability of the benefits paid out of such a plan. Accordingly, if a self-insured plan is structured as described above, employer contributions to the trust would generally be deductible in the year they are made, pursuant to section 9 of the Act. For the purposes of paragraph 6(1)(a) of the Act, the employees would not be deemed to have received a taxable benefit by virtue of the employer contributions nor would the benefits paid under the PHSP be considered taxable.

These comments represent our opinions of the law as it applies generally and as indicated in paragraph 21 of Information Circular 70-6R2 are not binding on the Department. Nevertheless, we hope that our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch