28 May 1996 External T.I. 9613915 - Tax Consequences Amend.-Cost Sharing-Health Benefit Plan

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:

In respect of employer provided health benefits, wage loss replacement benefits and group term life insurance benefits, does a change in the cost sharing arrangement, to provide for total employer funding, result in a taxable benefit to the employee?

If there is a coincidental negotiated decrease in the salary levels would the increased employer contributions remain non-taxable to the employee?

Are employer contributions under the amended arrangements deductible to the employer?

Position:

As long as employer contributions are in respect of benefits listed in subparagraph 6(1)(a)(i) then they would not be taxable to the employees.

If employment contracts are renegotiated to effect lower salary levels there would be no tax consequences. If increased employer contributions is really a redirection of amounts of salary legally due to the employee under a valid contract of employment, then taxable remuneration would not be decreased, the contributions would be employee contributions.

Contributions to health benefit plans that are actuarially determined and reasonable are deductible to the contributing employer.

Reasons:

Subparagraph 6(1)(a)(i) excludes from inclusion in income from employment the amount of employer contributions to certain health benefit plans and other plans.

The withholding of amounts legally due to employees as salary cannot be characterized as employer contributions when forwarded to plan administrators.

The contributions are considered part of labor cost, laid out to earn income as long as it is reasonable.

		961391
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

May 28, 1996

Dear Sirs:

Re: XXXXXXXXXX
Group Insurance Arrangements

This is in reply to your letter of April 17, 1996, in which you requested our views regarding the changes being contemplated by XXXXXXXXXX in the existing funding arrangements related to various group insurance coverages made available to XXXXXXXXXX and their employees.

XXXXXXXXXX

The members can opt to make any one or a combination of these products available to their employees or they could opt for the group insurance product combinations offered by other insurance companies. The group insurance products referred to include life insurance, accidental death and dismemberment insurance, private health services plan benefits, long-term disability insurance and wage loss indemnity.

In addition to making a combination of group insurance plans available to its employees, XXXXXXXXXX can determine the extent to which premiums in respect of these plans will be shared by the employee and the employer. The employer-employee relationships themselves are governed by both verbal and written contracts of employment.

You have asked for our views, in respect of each of the plans being offered, on the effect of the change, and the manner of change, in the premium sharing arrangement set out in your submission.

Group Medical Plans

Under a typical existing arrangement, the premiums with respect to the group medical plans are shared equally by the employer and employee. We will assume for the purpose of this query that the plans each qualify as a private health services plan ("PHSP") as defined in section 248 of the Income Tax Act (the "Act"). The employer-paid portion of the premium is not included in the employee's income as a taxable benefit by virtue of the specific exclusion for PHSP premiums set out in subparagraph 6(1)(a)(i) of the Act, and the employee-paid portion would qualify as a medical expense by virtue of paragraph 118.2(2)(q) of the Act.

You have set out an example, to illustrate the situation, in which the employer presently shares the cost of the premiums ($100 per month) with the employee on a 50/50 basis with the tax consequences as described in the previous paragraph. This premium sharing arrangement may be amended so that the employer assumes the obligation for the full premium. In conjunction with this premium sharing amendment, the employee's gross monthly wages would, under three different scenarios, be reduced by $50, $75 and $25 per month.

In response to your specific queries related to these changes we advise as follows:

1.When an amended arrangement shifts the legal obligation to pay a portion of the premium from the employee to the employer, the increased employer-paid premium will not be included in the income of the employee by virtue of the exclusion set out in subparagraph 6(1)(a)(i) of the Act.

2.Whether a decrease in an employee's salary, as part of the amended arrangement, has tax consequences depends on the employee's legal entitlements under the contract of employment. When a contract of employment is renegotiated to incorporate a decrease in the level of salary or wages to be paid to the employee over the term of the contract the amount of the decrease, regardless of its size, will not have tax consequences. A corresponding or coincident increase in the amount of premiums paid by the employer in respect of the PHSP will not be treated as a taxable benefit to the employee and added to the decreased salary. However, if an employee has a legal entitlement, pursuant to the terms of a valid employment contract, to a certain level of salary which is taxable as income from employment, the diversion of a portion of that salary towards the payment of premiums in respect of a PHSP will not serve to reduce the amount of salary that is subject to tax. In such circumstances, the amounts withheld from income by the employer and used to cover the premium obligations will not be considered as employer contributions but rather after-tax employee contributions. If the previous contract of employment is only verbal, the onus will be on the employer to satisfy the Department, when queried, that a valid renegotiated employment agreement is in place.

3.Amounts paid by the employer as premiums and deposits to the PHSP (including the applicable sales tax) are deductible in the computation of income under subsection 9(1) of the Act, as long as amounts required to be contributed to the PHSP are reasonable in the circumstances; i.e., actuarially determined.

4.Our responses to items 1 to 3 would not change if the premium sharing arrangements varied with each employee.

Disability Plans

Presently, there are wage loss replacement/disability plans in place for which an employee pays the entire premium. The premium paid by an employee is equal to 1.0% of the employee's gross salary. You have set out an alternate scenario in which a disability plan presently in place will, on a go-forward basis, be funded by premiums that are paid entirely by the employer. To that end, the employer will renegotiate all employment contracts to include a provision that the obligation to pay the premiums will be borne by the employer. At the same time, the contracts will be amended to reduce pay levels of the employees by an amount that is approximately equivalent to the annual premiums.

In response to your specific queries we advise as follows:

1.Assuming that these amendments are put into effect you have asked whether the plan would still be considered an employee-pay-all plan if the employer were to add the premiums to the employee's income, by virtue of paragraph 6(1)(a) of the Act. Paragraph 6(1)(a) of the Act requires the inclusion in income from an office or employment the value of board, lodging and other benefits of any kind whatever, except those listed in subparagraphs 6(1)(a)(i) to (v). Subparagraph 6(1)(a)(i) includes contributions made by the taxpayer's employer to a group sickness or accident insurance plan (and similarly named group plans, collectively known as wage loss replacement plans). Consequently, the value of employer paid premiums is not to be included in the employee's income. We refer you to the comments found in paragraph 14 of IT-428 "Wage Loss Replacement Plans." As a result, the plan would not be considered an employee pay-all plan.

2.With respect to the treatment of the decrease in employee's salary please refer to our comments under item #2 of "Group Medical Plans."

3.As indicated in our comments under item #1 herein, if the employer is contractually obligated to and does pay the premiums with respect to the wage loss replacement plan, the premium is not to be included in the income of the employee, by virtue of subparagraph 6(1)(a)(i) of the Act. The subsequent benefits received will be taxable under paragraph 6(1)(f) to the extent that the benefit received by the employee exceeds the total of that employee's contributions under the plan before the end of the year.

4.With respect to the deductibility of employer-paid premiums under a wage loss replacement plan, our comments under item #3 of "Group Medical Plans" equally apply.

Group Term Life Insurance Plans

At present, XXXXXXXXXX have in place for their employees, group term life insurance coverage for which the premiums are shared between the employer and the employee. XXXXXXXXXX is contemplating amending the premium payment arrangement by taking over the obligation to pay the entire premium. At the same time, employment contracts will be renegotiated to reduce salary levels in amounts that are approximately equivalent to the additional employer share of insurance premiums under the new arrangement.

In response to your specific queries we advise as follows:

1.The tax treatment of contributions by the employer under a "group term life insurance policy," as that term is defined under subsection 248(1) of the Act, is set out in paragraph 6(1)(a)(i), subsection 6(4) of the Act and (draft) Part XXVII of the Income Tax Regulations. For insurance coverage in respect of periods prior to July 1994, subsection 6(4) of the Act, as it then read, provided that, notwithstanding the reference in subparagraph 6(1)(a)(i) to the exclusion of the employer-paid premium as a taxable benefit, a benefit is computed based essentially on the portion of the premiums that relate to group term life insurance coverage in excess of $25,000. As a result of legislative amendments enacted in 1994, in respect of coverage periods after June 1994, the benefit calculation governed by subsection 6(4) is prescribed and set out in Part XXVII of the Regulations. Primarily, the calculation removes the exemption with respect to the first $25,000 of coverage on the life of an employee. This means that, in essence, the entire premium in respect of the employee is to be included in the employee's income. For your further information, the effects of these amendments are described in the Department's publication, "Employer-Provided Group Term Life Insurance," available at your local tax services office.

2.With respect to the treatment of the decrease in the employee's salary, please refer to our comments in item #2 under "Group Medical Plans."

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch