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.
whether an employee pay all plan exists separate from the plan to which the employer contributes. In particular, employer to provide core benefits & employees may fully fund optional increases -Does the fact that the plans are co-ordinated to ensure that disability income not exceed a certain percentage of pre-disability income cause the plans to be considered a single plan?
2 separate but co-ordinated plans could exist
Reasons FOR POSITION TAKEN:
while the co-ordination of benefits could impact on the amount payable out of a particular plan (& thus the level of benefits payable out of 1 plan might be considered to be dependent on the other plan), such impact does not represent a cross-subsidization - if there are no other sources of income received while disabled, the co-ordination will not impact on the level of benefits since the purpose of the additional plan is to provide additional benefits. Confirmed by telephone that his other query is no longer relevant.
July 5, 1995
Re: Optional and Core coverage under a Group Disability Plan
We are replying to your letter of March 7, 1995 in which you requested our views on the tax status of disability insurance offered under a flexible benefit plan.
Under the flexible benefit plan described in your letter, disability insurance is offered in two components; core coverage which provides income replacement benefits up to 50% of gross salary to all employees and optional coverage which provides income replacement benefits of up to 20% of the employee's gross salary. The premium for the core coverage is fully paid by the employer and the premium for the optional coverage is funded solely by payroll deductions. For the purpose of your query, it is assumed that an employee cannot use flex credits to obtain the optional disability coverage. The premium rates for each component or plan is established independent of the other component or plan, each component or plan is provided through a separate insurance contract and the insurance contracts are not cross-experienced. The accounting and administration for premiums and claims under each component or plan is separate.
You advise that it is customary in the insurance industry to coordinate the amount of benefit payable under an income maintenance plan with other income sources received by an individual during the period of the disability so that the total income replacement payable under the plan or plans does not exceed a specified percentage of the individual's pre-disability earnings. Other sources of income which may be taken into consideration in calculating the actual amount of a benefit include Canada or Quebec Pension Plan benefits, Workers' Compensation benefits, rehabilitation earnings and benefits received from other disability plans.
The core plan provides benefits equal to the lesser of;
-50% of the employee's pre-disability salary or
-80% of the gross pre-disability earnings less income received while disabled from other sources.
The optional plan provides benefits equal to the lesser of;
-20% of pre-disability salary or
-85% of the net pre-disability earnings less income received while disabled from other sources other than the benefit payable from the core plan.
The reason that the calculation for the ceiling of benefits under the optional plan is different from that of the core plan is to avoid a circularity problem which would otherwise arise.
As the specified percentage for the purpose of coordination would normally exceed the combined level of benefits available under both plans, the benefit received out of either plan would normally not be reduced unless the employee had another source of income such as Canada Pension Plan or Worker's Compensation benefits. In the example given, the level of benefits payable under each plan will only be affected by the other if the disabled employee has another source of income which is included in the benefit coordination calculation.
You ask whether the core disability insurance and optional disability insurance can be considered payable out of separate plans so that benefits derived from the optional coverage are not included in income under paragraph 6(1)(f) of the Act while the benefits derived from the core plan are included in income to the extent provided by paragraph 6(1)(f) of the Act.
While it is a question of fact as to whether or not an employee-pay-all plan exists, in the situation you describe the two plans will not be considered a single plan solely by reason of the coordination of benefits.
In the example given in your letter, it was assumed that each of the disability plans would be funded by separate insurance policies. You also ask whether the two plans could be funded by a single policy and still be considered as two separate plans. While separate employer records and separate insurance policies are not required in order to consider the plans as separate, there must not be any cross-subsidization between the plans and the level of benefits, the premium rates, the qualifications for membership and other terms and conditions of each of the plans must not be dependent upon the existence of the other plan or plans. If the policy is experience-rated, separate experience ratings must be established for each plan.
We would emphasize that the above comments do not represent an advance ruling and as such is not considered binding on the Department with respect to any particular plan.
We hope our comments will be of assistance to you.
Business and General Division
Income Tax Rulings and
Policy and Legislation Branch
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