11 March 1998 External T.I. 9703585 - SELF-INSURED LIFE INS IS AN EBP PAYING A DEATH BENEFIT

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:

income inclusion for an employee relating to a self-insured life insurance benefit (by way of an ASO contract with an insurance company)

Position:

a self-insured life insurance benefit is a promise to provide a death benefit - no amount is included in income under 6(4) but the survivor includes the amount of any death benefit as determined under the Act in income. Since the provision of a death benefit is not provided by means of a group term life insurance policy, the entire plan will be an employee benefit plan, unless the insurer segregates the contributions, income and disbursements relating to the death benefit from the rest of the plan

Reasons:

unlike the other 6(1)(a) exempt benefits, one of the requirements to be a group term life insurance policy is that it be a policy of insurance, and not just a plan of insurance. Although the death benefit is not included in the survivor's income under 6(1)(g), the arrangement to provide the benefit is an employee benefit. Any amount received by the survivor in excess of the employee's contribution to the employee benefit plan will be a death benefit to the extent that it exceeds the exemption level found in the def'n in 248(1)

A. Humenuk
XXXXXXXXXX 970358

Attention: XXXXXXXXXX

March 11, 1998

Dear XXXXXXXXXX:

Re: Survivor Benefits payable under an Administrative Services-Only Contract

We are replying to your letter of February 7, 1997, in which you ask for an advance income tax ruling in respect of the XXXXXXXXXX.

As we understand the facts, the XXXXXXXXXX is a multi-employer plan which provides various benefits for the employees of the participating employers. One of the benefits provided under the XXXXXXXXXX is the payment of a lump sum to a beneficiary named by the employee upon the death of that employee (survivor benefits). Both the employer and the employees are required to pay a share of the cost of this benefit.

Under a financial agreement with an insurance company dated XXXXXXXXXX, the benefits under the XXXXXXXXXX became subject to an administrative services contract. The insurance company receives an administration fee for each XXXXXXXXXX benefit administered. The insurance company also receives a risk charge, but only in respect of the long-term disability insurance plan. Although the XXXXXXXXXX benefits are self-insured, the insurance company establishes renewal rates for each type of benefit according to actuarial principles.

In our conversation of May 5, 1997 (XXXXXXXXXX\Humenuk), you stated that the contract with the insurer includes a catastrophe stop-loss clause; however the contract provided to us does not contain such a clause, unless you are referring to the risk charge payable in respect of the long-term disability insurance plan.

It is your understanding that the survivor benefits are provided by means of a group term life insurance policy. You asked for a ruling to approve a change in the method of calculating the employees' benefit from coverage under a group term life insurance policy.

As discussed with you on February 14, 1997 (XXXXXXXXXX/Humenuk), we cannot rule on matters which primarily involve tax-related calculations or when no proposed transaction is contemplated. Since your request involves both of the above, or would if the survivor benefits were provided under a group term life insurance policy, we cannot provide you with the ruling requested. However, we can provide you with the following comments which we hope will be of assistance to you.

Without further details concerning the catastrophe stop-loss provision, we cannot provide you with any comment on its effect on a contract for administrative services. Since a policy of insurance involves the transfer of risk, a contract which does not involve a transfer of risk (including an administrative services-only contract with an insurance company) is not a policy of insurance. Since an administrative services-only contract is not a policy of insurance, it is not a group term life insurance policy as defined in subsection 248(1) of the Income Tax Act (the "Act"). As a result, funds held by an insurer under an administrative services-only contract for benefits payable upon the death of an employee will be considered an employee benefit plan as defined in subsection 248(1) of the Act. Based on the financial agreement submitted with your request, it is our view that the survivor benefits provided under the XXXXXXXXXX are not provided by means of a group term life insurance policy and accordingly, no amount is required to be included in any employee's income under subsection 6(4) of the Act in respect of this benefit.

Interpretation Bulletin IT-502 and Special Release, Employee Benefit Plans and Employee Trusts, describes the tax consequences arising from an employee benefit plan for the employer, the employees and for the custodian of funds held in the plan. When the benefits payable out of an employee benefit plan are restricted to benefits to be provided to an employee's dependants after the death of that employee, no amount is required to be included in an employee's income on account of that plan. Such benefits are not included in income by virtue of either subparagraph 6(1)(g)(i) (an amount of death benefit) or subparagraph 6(1)(g)(ii) (a return of the employee's own contributions) of the Act. However, any amount received out of the plan in excess of the employee's contributions to the plan would be included in the calculation of the gross amount of the death benefit as defined in subsection 248(1) of the Act. Interpretation Bulletin IT-508R explains how to calculate the amount of the death benefit to be included in the beneficiary's income under subparagraph 56(1)(a)(iii) of the Act.

We would also like to draw your attention to Interpretation Bulletin IT-85R2, Health and Welfare Trusts for Employees. As stated in paragraph 4 of this bulletin, when part of a single plan can be considered an employee benefit plan and part can be regarded as a plan described in paragraph 1 of that bulletin, the entire plan will be considered an employee benefit plan unless the plan administrator separately identifies and accounts for the contributions, income and disbursements of the part which qualifies for the treatment described in the bulletin. Since the survivor benefits are not provided through a group term life insurance policy, it is our view that the entire XXXXXXXXXX will be an employee benefit plan unless the insurance company segregates the contributions, income and disbursements relating to the survivor benefits separately from the other benefits provided under the XXXXXXXXXX.

Please contact the XXXXXXXXXX Tax Services Office if you need assistance in correcting any T4 information slips issued in respect of the employers' contributions in respect of the survivor benefits for prior years. We have enclosed copies of the various bulletins noted above.

Your deposit will be returned under separate cover.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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