8 November 1996 External T.I. 9626655 - 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:

whether a draft trust agreement submitted qualifies as a H&W Trust

Position:

comments provided

Reasons:

									962665
XXXXXXXXXX							Sandra Short

Attention: XXXXXXXXXX

November 8, 1996

Dear Sirs:

Re: Health and Welfare Trust: XXXXXXXXXX

This is in reply to your letter of July 26, 1996, which asks that we review the Health and Welfare Trust for XXXXXXXXXX You have asked whether the declaration of trust, forwarded with your letter, qualifies as a health and welfare trust.

As discussed in paragraph 15 of Interpretation Bulletin IT-85R2 "Health and Welfare Trusts for Employees," there is no formal registration procedure for a health and welfare trust and there is no requirement that a trust agreement be submitted to the Department for approval prior to the implementation of the plan. We offer general comments on Private Health Services Plans (PHSPs) below as well as comments relating specifically to the Health and Welfare Trust document submitted by you.

The term "private health services plan" is defined in subsection 248(1) of the Income Tax Act. A PHSP need not be set up as a "health and welfare trust" as is discussed in Interpretation Bulletin IT-85R2. Interpretation Bulletin IT-339R2 discusses PHSPs specifically, including "cost plus" plans.

In a "cost plus" plan, an employer contracts with a trusteed plan or an insurance company for the provision of indemnification of employees' claims on defined risks under the plan. The employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employee's contract of employment requires the employer to reimburse the plan or insurance company for proper claims (filed by the employee) paid, and a contract exists between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing.

The expenses covered by any PHSP (including a PHSP administered through a health and welfare trust) must be restricted to expenses which would normally qualify as medical expenses as defined in subsection 118.2(2) of the Act and amounts paid out must be for one or more of the employees, an employee's spouse (including a common-law spouse or a same-sex partner) or any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption. Plan documentation can take the form of a booklet or manual which is made available to employees covered by the plan. If an employer's plan provides benefits which do not qualify for inclusion in a health and welfare trust, the plan will be considered an employee benefit plan or employee trust as described in Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts".

While a PHSP may exist in various forms, including a contractual arrangement between an insurance company and an employer as discussed above, an employer may choose to offer medical and hospital care benefits through a trust arrangement, as discussed in Interpretation Bulletin IT-85R2. It appears that the trust document submitted is intended to be a "cost plus" PHSP, administered through a health and welfare trust, although XXXXXXXXXX of the trust document suggests that a PHSP other than a "cost plus" plan may also be administered in some situations.

Clause XXXXXXXXXX of the draft Trust document states that the trustees shall advise each employer of the amount of contribution required to adequately fund the employer's plan, based on the plan and the nature of the benefits required. In a "cost plus" plan, the amount of "contributions" to the trust should equal the amount of qualifying expenses incurred by an employee or other qualified individual (see preceding paragraph) plus the agreed upon administration fee. If the agreed consideration is in the form of cash premiums, the contributions should relate closely to the coverage provided by the plan and should be based upon computations involving actuarial or similar studies.

Clause XXXXXXXXXX states that an employer shall contribute to the trust according to the advice of the trustees and that the trust shall be responsible to pay a benefit to an employee only after adequate funding has been received by the trust. In a "cost plus" plan, it is usually the employees' contract of employment which legally obligates the employer to reimburse the plan or insurance company for proper claims filed by the employee and paid by the plan or insurance company. The trusteed plan or insurance company is required to reimburse employees so long as the employment contract is in good standing.

For other funding arrangements in a Health and Welfare Trust, trustees must have the legal authority to obligate employers to make necessary contributions. While clause XXXXXXXXXX states that employers "shall" contribute to the trust, it is not clear that the trustees are charged with an enforceable right to demand contributions should an employer not make the required contributions. We note that clause XXXXXXXXXX which delineates some of the powers of the trustees states that trustees "may request and collect contributions...."

Clause XXXXXXXXXX states that the trustees are not responsible for checking the legitimacy of any claim presented under a plan. Who is? We note that clause XXXXXXXXXX states that the trustees are charged with administering the trust and all plans. As discussed above, if a plan allows expenses outside of the purview of subsection 118.2(2) of the Act, the plan will be considered an employee benefit plan or employee trust. Clause XXXXXXXXXX clearly states that the funds of the trust shall be used only for providing PHSP benefits so there should be some mechanism in the trust or individual plan documents to ensure that this is the case.

As a related issue, employer control over the use of the funds of a trust occurs when the beneficiaries of the trust have no claim against the trustees or fund except by or through the employer. It is not clear to us whether the plan documents will address this issue but the draft trust document is silent on this point.

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