| 24(1) | 901525 |
| M. Eisner | |
| (613) 957-2138 | |
| 19(1) |
November 14, 1990
Dear Sirs:
This is in reply to your letter of July 6, 1990 in which you raised a number of concerns relating to a long-term disability plan. We regret the delay encountered in providing a response.
You have outlined a situation where an employer has established, for its employees, a long term disability (LTD) plan with a life insurance company. The employees pay the premiums for the coverage through payroll deductions. Under the contract with the insurer, the employer remits the total premium thus collected to the life insurance company. As a result of the experience rating for the employee group, a deficit or surplus is determined annually by the life insurance company. If a deficit is determined, premiums are increased in the following year. If a surplus is determined, the balance is deposited into an account with the life insurance company.
With respect to the above situation, you have asked three questions:
(1) If the surplus is used to pay a portion or all of the ensuing year's premiums, does the plan continue to qualify as an employee-pay-all plan?
(2) If the surplus account bears interest, who is to report it?
(3) If the employer pays external consulting, fees with respect to a review of the plan, a review of long-term disability rates available with other insurers and other matters, does the plan cease to qualify as an employee-pay-all, plan?
Before responding to the questions you have asked, we would advise that our experience has shown that insurance plans vary greatly in substance and it would be necessary to review the documents of a particular plan before specific comments could be made. As a copy of a plan document has not been provided to us, our comments are necessarily limited in scope and general in nature.
With respect to the first question, a surplus consisting of an accumulation of employee-paid premiums (and any income earned thereon) that is used to pay the ensuing year's premiums as required under the plan would not, in and by itself, result in disqualification of the plan as an employee-pay-all plan referred to in Interpretation Bulletin IT-428.
With respect to the second question, the fact that the surplus arose from employee contributions is an indication that they may be required to report this income. However, before more meaningful comments could be provided, it would be necessary to review the relevant terms of the particular plan. We would also add that if the employees were required to report the interest income, we would not be prepared administratively to permit any other taxpayer, such as the employer, to report the interest income and then be entitled to a reimbursement of the related tax cost from the surplus account.
Your last question seems to relate to expenses incurred in evaluating the LTD plan. In clarifying the nature of the expenses incurred, you advised that the expenses are not incurred to cover costs in connection with the establishment, administration, or wind-up of a selected plan with a particular carrier but rather amounts paid to outside consulting firms in return for services rendered in evaluating comparable plans with a view to recommending the plan or carrier that would meet the client specifications. Such costs, when covered by the employer, would not taint the employee-pay-all character of the plan eventually selected. Once a plan is selected and the set up costs or fees charged by the plan administrators in respect of the particular plan are paid by the employer then the plan would not be considered an employee-pay-all plan.
In summary we would emphasize that the above comments represent general views only and should you wish a more specific opinion with respect to a particular plan, the plan documents should be submitted with your request.
We trust that the foregoing comments will be of some assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch