7 March 1995 External T.I. 9503065 - MULTI-EMPLOYER DISABILITY PLAN AS EE PAY ALL

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 disability plan is a group plan & is it an employee pay all plan for the purpose of determining whether benefits will be taxable under 6(1)(f)
plan also provides a maternity benefit, a death benefit & dental care insurance

Position TAKEN: if death benefit & maternity benefit are provided through a separate plan, the portion of the plan providing dental care & short term disability will not be treated as an employee benefit plan & disability benefits will be taxable under 6(1)(f)

Reasons FOR POSITION TAKEN:

plan was a group plan & based on documentation submitted obligation for contributions rests with employer

A. Humenuk
XXXXXXXXXX 950306

Attention: XXXXXXXXXX

March 7, 1995

Dear XXXXXXXXXX:

Re: Employee Benefits

Your letter of January 26, 1995 addressed to XXXXXXXXXX Tax Services office has been referred to us for reply.

XXXXXXXXXX
administers a short term disability plan for the employees of the XXXXXXXXXX

Participation in the plan by municipalities is voluntary in that each municipality may set their own rules as to who is covered by the plan. The only restriction on a municipality is that all elected or appointed officials of that municipality must be covered if any one such official is to be covered. Under the terms of the plan, the municipalities are responsible for the premiums and, as agents for the employees, will receive any benefits payable out of the plan. In our conversation of February 27, 1995 (XXXXXXXXXX/Humenuk), you indicated that while you suspect that none of the employees are covered by a collective agreement, some municipalities may have imposed a requirement on their employees to pay the premium in order to obtain the coverage under the plan.

The plan has been in place since XXXXXXXXXX As a result of a surplus that has accumulated over the years, the terms of the plan have been altered to increase the benefits to include the payment of an amount upon the death of an employee covered by the plan, an amount payable as a maternity benefit for female employees covered under the plan and a partial reimbursement of the cost of the employee's dental care to a maximum annual amount.

Separate from the amount levied on the municipalities to provide coverage under XXXXXXXXXX, you advise that the municipalities are required to pay premiums to a long term disability plan administered by the
XXXXXXXXXX

While coverage is mandatory for the administrator of each municipality, each municipality has the option of extending coverage to all employees of that municipality.

It is your understanding that disability benefits will only be included in an employee's income where the employer made the contribution and did not include the amount on the employee's T4 information slip. You have asked us to clarify the tax consequences relating to payments out of the XXXXXXXXXX plan and the XXXXXXXXXX as well as whether Canada Pension Plan contributions and unemployment insurance premiums are required in respect of such benefits.

The tax consequences relating to your plan involves a finding of fact which can only be determined upon review of all the relevant facts and documentation pertaining to that plan, including the collective agreements or other documentation governing the rights and obligations of the employees in each of the municipalities. In addition, we cannot comment on the XXXXXXXXXX plan without authorization from either the plan administrator or the municipalities. Thus, the following comments on the XXXXXXXXXX plan are based solely on the information provided with your letter.

Prior to addressing the issues raised in your letter, one must first determine what constitutes "the plan" and who is obligated to pay the premium under that plan. Our review of the documentation in respect of the XXXXXXXXXX plan suggests that it is a multi-employer self-insured plan with XXXXXXXXXX acting as the plan administrator providing short term disability benefits, dental care insurance, maternity benefits as well as a lump sum payment upon the death of an employee covered by the plan.

As stated in paragraph 3 and 4 of Interpretation Bulletin IT-85R2 "Health and Welfare Trusts", a plan which provides benefits in addition to those provided through plans described in paragraph 1 of that bulletin will generally be treated as an employee benefit plan or employee trust unless the plan administrator accounts for the contributions, income and disbursement of benefits for those additional benefits separately from that which can be treated as a health and welfare trust. Where such a segregation is made, there must be no cross subsidization between the two plans.

The amount described in the plan as a death benefit will qualify as a death benefit as defined in subsection 248(1) of the Act and would thus ordinarily not be included in the income of the recipient provided that the total of all amounts received upon or after the death of the employee in recognition of that individual's employment in an office or employment did not exceed $10,000. However, the inclusion of such an amount in the XXXXXXXXXX plan would cause the plan to be treated as an employee benefit plan unless the funding was segregated in the manner described above. Please note that the municipality is required to withhold tax from the amount of the death benefit paid upon the death of the employee and to report the amount as a death benefit on an information slip.

Our understanding of the maternity benefit is that it is paid as a lump sum and is not paid on account of sickness or accident relating to a pregnancy. Thus, the provision of this benefit through the plan would likewise cause it to be treated as an employee benefit plan unless the funding was segregated in the manner described above.

Our review of the plan regulations relating to the dental benefit indicates that the provision of the dental benefit can be considered a private health services plan as defined in subsection 248(1) of the Act. Accordingly, the inclusion of such a benefit as part of the short term disability plan would not cause the plan to be treated as an employee benefit plan.

The comments which follow concerning the disability benefits payable under the plan are based on the assumption that steps are taken to segregate the benefits which do not qualify for inclusion in a health and welfare trust from those that do.

While the XXXXXXXXXX plan documentation imposes the liability for contributions on the municipalities, reference should be made to the collective agreements or other documentation governing the rights and obligations of the employees of each of the municipalities in order to determine whether the liability for the contribution has been transferred to the employees. The comments in paragraph 20 of Interpretation Bulletin IT-428 "Wage Loss Replacement Plans" would not apply as the XXXXXXXXXX plan is a group plan. As stated in paragraph 17 of Interpretation Bulletin IT-428, an employer cannot change the tax status of a plan by adding the amount of the employer's contributions on the T4 information slips of the employees.

Further clarification may be required in respect of what constitutes a contribution by the employer to a plan. It is our view that the term "employer's contribution to the plan" implies a contractual obligation on the part of the employer to the insurer to pay all or part of the premiums required. Unless it can be established that the obligation, or legal requirement to the same effect, has been transferred to all the employees covered by the XXXXXXXXXX plan, the benefits derived from the plan will be included in the employee's income to the extent provided by paragraph 6(1)(f) of the Act. Whether the plan was funded through a self-insured arrangement or by the payment of premiums in respect of an insurance policy would not affect the determination of whether or not a particular plan was an employee-pay-all plan as described in paragraph 16 of Interpretation Bulletin IT-428.

The reason that the municipality cannot voluntarily add the value of the employer's contribution to the employee's T4 information slip is that paragraph 6(1)(a) of the Act provides a statutory exemption for such a contribution. Furthermore, the taxation of benefits received out of the plan would not be altered by the fact that an employee might voluntarily include the value of the employer's contribution in income.

XXXXXXXXXX Tax Services office will be able to address your questions relating to the liability for Canada Pension Plan contributions and unemployment insurance premiums in respect of the benefits payable out of the plan. We have enclosed copies of the bulletins referred to in our letter.

We trust our comments will be of assistance to you.

Yours truly,

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