Revenue Canada Taxation Head Office
XXXX
R. Langevin (613) 957-2138
June 24, 1987
Re: Self-Insured Health and Welfare Plans Sponsored by Single Employers
This is in reply to your letter dated April 13, 1987, respecting the above-captioned matter. You have indicted that one of your clients, an employer, is administering on a self-insured basis without the existence of a health and welfare trust the following programs:
1. Short term disability
2. Extended health care
3. Dental care
You have asked whether a health and welfare trust is necessary to ensure the most favourable treatment of contributions and benefit payments to the employer and employees respectively.
For the purpose of providing our comments, we shall assume that the short term disability program you have referred to would qualify as a wage-loss replacement plan and that both the extended health care program and the dental care program would qualify as private health services plans ("PHSP"). As we have not examined the relevant documentation, however, we make no comment on the legitimacy of these assumptions.
Self-insured health and welfare plans will ordinarily be governed by a trust agreement wherein the trustees have the responsibility of receiving an employer's contributions to the trust fund established by the trust agreement and arranging for the provision of plan benefits to participants. The trustees could be officers and/or senior management employees of the employer. The trustees, in some cases, will enter into a contract with an insurance company for the provision of administrative services with respect to the plan. In consultation with the insurance company, the trustees will determine, on an actuarial or similar basis having regard to actual experience, the level of contributions required to be made to the trust fund in order to adequately fund the benefits made under the plan and will advise the employer accordingly. Payment of claims are made by the trustees from the trust fund by cheques drawn upon a bank account or accounts established and maintained by the trustees for the purposes of receiving contributions from the employer and payment of such claims. These cheques could be signed by the insurance company as the trustees' disbursing agent. The trust agreement would further provide that no part of the trust fund could be used or diverted to purposes other than for the exclusive benefit of participants under the plan. Under no circumstances could any portion of the capital or income of the trust fund directly or indirectly revert or accrue to the benefit of the employer.
If self-insured plans are structured as described above, employer contributions to the trust fund would be deductible in the year they are made pursuant to section 9 of the Act. Pursuant to paragraph 6(l)(a) of the Act, the employees would not be deemed to have received a taxable benefit by virtue of these contributions, nor would they be taxable on any benefits paid under a PHSP. Amounts received by an employee from a wage-loss replacement plan would be taxable to him in the year received pursuant to paragraph 6(1)(f) of the Act. The trust itself may be taxable on income earned that is not paid or payable to an employee in a given year.
In circumstances where a self-insured plan is not governed by a formal trust agreement and payments for claims under the plan are made from funds (or income earned thereon) which remain the property of the employer or can revert to the employer a deduction for contributions to such a fund will not be available to the employer until actual payments are made to or for employees pursuant to the terms of the plan.
If no formal trust agreement exists and the plan's funding is not based on insurance principles, the arrangement would be considered to be an unfunded contingency reserve on the part of the employer. Again, no deduction will be available to the employer for any contributions to such a fund until actual payments are made to or for employees pursuant to the terms of the plan.
Any benefits paid to employees from this type of arrangement as short term disability benefits will be included in their income pursuant to subsection 5(1) as opposed to paragraph 6(1)(f) of the Act since the plan would not qualify as a wage-loss replacement plan.
In the case of a health plan, if the plan qualifies as a PHSP, benefits received by employees will not be taxed, regardless of whether or not the plan is trusteed. However, if payments are made out of a health plan that does not meet the conditions set out in paragraph 110(8)(a) of the Act, the employees will be taxed pursuant to paragraph 6(1)(a) of the Act on the amount of the reimbursement of their medical bills.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70- 6R, they are not binding on this Department.
We trust the foregoing is of assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch