Canada Revenue Taxation Head Office
XXXX
G. Kauppinen (613) 995-0051
April 28, 1986
Dear Sirs:
This is in reply to your letter dated December 2, 1985, regarding health and welfare plans.
You have outlined a situation wherein an employer presently has a private health services plan as defined in paragraph 110(8)(a) of the income Tax Act ("Act") and an income maintenance insurance plan within the meaning of subparagraph 6(1)(f)(iii) of the Act.
The plans are currently insured with an insurance company. It is proposed that the plans change to a self-insured basis with the insurance company providing administrative services only. You have asked for our comments regarding the potential tax consequences with respect to such change.
The fact that health and welfare plans become self-insured will not necessarily in and by itself result in any change in tax treatment to the company or its employees. In the most common situation, a self-insured health and welfare plan will be governed by a trust agreement wherein the trustees thereof 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. The employees would not be deemed to have received a taxable benefit by virtue of these contributions. Benefits paid under a private health services plan would not be taxable to the employee pursuant to paragraph 6(1)(a) of the Act. Amounts received by an employee from an income maintenance 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. Furthermore, if the health plan 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 Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch