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.
Principal Issues: Whether a long-term disability plan funded entirely by employee contributions could be held in a HWT or an ELHT.
Position: Question of fact.
Reasons: In this case, where the employee contributions are not used to purchase insurance coverage from a third party insurance provider and no one has assumed the risk of indemnifying the parties, it is likely that the plan will not be a plan in the nature of insurance and consequently, will not be considered a "group sickness of accident insurance plan".
XXXXXXXXXX 2010-037489
Renee Sigouin
(613) 957-2128
March 14, 2011
Dear XXXXXXXXXX :
Re: Wage Loss Replacement Plans
This is in response to your letter of July 8, 2010 wherein you asked whether a long-term disability plan funded entirely by employee contributions could be held in a health and welfare trust ("HWT") or in an Employee Life and Health Trust ("ELHT") within the meaning of subsection 144.1(2) of the Income Tax Act (the "Act"). We apologize for our delay in responding to your request.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
You have advised that an employer provides a long-term disability plan to its employees that is funded entirely with employee contributions. The employer collects contributions from its employees and administers the plan or has it administered by an insurer on an Administrative Services Only ("ASO") basis. The plan is not insured with a third party insurance provider (i.e., contributions are not used to pay insurance premiums) and you have advised that the employer makes no contributions to or under the plan, although the employer incurs expenses in connection with its administration. The employer has settled a trust to hold the employee contributions and to pay long-term disability benefits under the plan.
Provided certain conditions are satisfied, a long-term disability plan may be held under a HWT or an ELHT. For information concerning HWT's including the conditions that must be met in order to qualify as a HWT, please refer to IT-85R2, "Health and Welfare Trusts for Employees".
In general terms and subject to satisfying various requirements, a health and welfare benefit program that is administered by an employer through a trust arrangement may be a HWT for purposes of IT-85R2, or an ELHT within the meaning of subsection 144.1(2) of the Act, where it is used exclusively to administer:
- a group sickness or accident insurance plan;
- a private health insurance plan;
- a group term life insurance plan; or
- any combination of the above plans.
In determining whether a particular disability plan qualifies as a group sickness or accident insurance plan, we note that the term "group sickness or accident insurance plan" is not defined in the Act. Such a plan is commonly referred to as a wage loss replacement plan as described in paragraph 14 of IT-428, "Wage Loss Replacement Plans".
Paragraph 7 of IT-428 indicates that a wage loss replacement plan must be an insurance plan. This paragraph explains that while a plan must involve insurance, it is not necessary that there be a contract of insurance with an insurance company. However, if insurance is not provided by an insurance company, the plan must be one that is based on insurance principles, i.e., funds must be accumulated, normally in the hands of trustees or in a trust account, that are calculated to be sufficient to meet anticipated claims. If the arrangement merely consists of an unfunded contingency reserve on the part of the employer, it would not be an insurance plan.
A plan in the nature of insurance, in this respect, must contain the following basic elements:
(a) an undertaking by one person,
(b) to indemnify another person,
(c) for an agreed consideration,
(d) from a loss or liability in respect of an event,
(e) the happening of which is uncertain.
A plan that is administered by an insurer on an ASO basis is not generally considered to be a contract of insurance, as the insurance company does not typically bear any risk in respect of the particular plan. In addition, an employer with no obligation to make contributions to or under a particular plan will also not assume any risk with respect to the provision of benefits under a plan.
Where a long-term disability plan is funded entirely by employee contributions and these contributions are not used to fund premiums under a third party insurance contract, the plan may not contain all of the abovementioned elements (i.e., particularly (a) and (b) above) and may not therefore be considered a plan in the nature of insurance. Such a determination is a question of fact which can only be made after a review of all of the relevant documentation (including especially, the plan) and facts.
A disability plan that is not a group sickness or accident insurance plan is not permitted to be held within a HWT or an ELHT. In response to your further query, this will be the case irrespective of whether the employer provides other employer-paid health and welfare benefits in the same trust.
We trust that these comments have been of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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