27 October 1994 External T.I. 9420055 - INSURANCE RESERVES FOR A HEALTH AND WELFARE TRUST

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:

health and welfare trust and establishment of reserves for future claims

Position TAKEN:

-contribution for reserve not deductible to employer
-investment income on reserve taxable to trust
-self-insured life insurance does not qualify for inclusion in a H&W trust but the payment out of the fund (likely an employee benefit plan) would be taxable as a death benefit and not employment income

Reasons FOR POSITION TAKEN:

trust is not an insurer or an insurance corporation as defined in the Act -no reserves. Employer can only deduct reasonable amounts which does not include contingency reserves. the 3rd qualifying item for a H&W trust is a group term life insurance policy which by def'n cannot be self-funded

A. Humenuk
XXXXXXXXXX				942005

Attention: XXXXXXXXXX

October 27, 1994

Dear Sirs:

Re: Self-funded Disability and Life Insurance Plans

We are replying to your letter of August 2, 1994 concerning the taxation of a trust set up by an employer to provide disability and life insurance benefits to its employees.

Your clients are large employers who wish to self-fund the group disability and life insurance benefits payable to their employees. It is your understanding that this can be accomplished through a trust arrangement whereby the employers would contribute sufficient amounts to both cover the cost of current claims and to establish sufficient actuarially determined reserves to cover future claims and expenses of the trust. You have asked for confirmation that a trust would not be taxable on the investment income earned on such reserves until such time as the amounts are paid out of the trust and that the employer would be entitled to a deduction for the amounts contributed to the trust.

The department's position on trusts set up to provide health and welfare benefits, including disability benefits, is outlined in the attached Interpretation Bulletin IT-85R2 "Health and Welfare Trusts for Employees". As stated in paragraph 4, where the benefits payable out of the trust include benefits other than those described in the first paragraph of that bulletin, the trust will not be considered a health and welfare trust. The benefit described in your letter as a "group life benefit" would not be a benefit eligible for inclusion in a self-insured health and welfare trust since the element of self-insurance would disqualify it from the definition of "group term life insurance policy" found in subsection 248(1) of the Act.

A trust which provides a settlement or other benefit to the dependants of an employee after the death of that employee would be treated as either an employee benefit plan or, less likely, an employee trust. The attached Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts" and special release thereto provides further information on the taxation of such amounts. In general however, the employer's deduction for contributions to such a trust would be limited to the amount paid in respect of or allocated to the employees in the year. To the extent that an amount paid out of an employee benefit plan can be considered to be the gross amount of a "death benefit" as described in paragraph 1 of the attached Interpretation Bulletin IT-508 "Death Benefits - Calculation", it is not required to be included in income under paragraph 6(1)(g) of the Act. Instead, the amount which qualifies as a death benefit is included in the recipient's income under subparagraph 56(1)(a)(iii) of the Act.

Group disability insurance benefits can be provided through a health and welfare trust. However, an employer's deduction for contributions to the health and welfare trust is limited to the amount that can reasonably be expected to be required for the payment of benefits in the current year, taking into account the plan's available funds, recent experience and reasonable expectations for the future. Such amounts are ordinarily actuarially determined on a periodic basis. However, an amount contributed to establish a reserve in the trust will not be deductible by the employer even if it is actuarially recommended.

The taxation of a health and welfare trust is described in paragraphs 11 to 14 of the bulletin. As stated in paragraph 14, contingency reserves are not deductible in computing the trust's income. Although there is provision in section 138 of the Act for a deduction of various specified reserves by an insurance corporation, there is no similar provision that would permit an unincorporated taxpayer, including a trust that provides health and welfare benefits on a self-insurance basis, to deduct any increase in a reserve, any investment or other income earned on such reserve in computing trust income for a taxation year. Accordingly, the trust will be taxed on the investment income earned to the extent that it is not offset by the amounts described in paragraph 12 of the bulletin.

We trust that these comments will clarify the Department's position in this matter.

Yours truly,

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