18 April 1995 Internal T.I. 9510210 - WAGE LOSS REPLACEMENT PLAN -NATURE OF INSURANCE

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.

DRAFT

Tax Executive Institute
Annual Tax Conference
May 7 - 10, 1995

Question No. 11

WAGE LOSS REPLACEMENT PLANS - IT-428

a) In Interpretation Bulletin IT-428, the rules for "Wage Loss Replacement Plans" are outlined. Many employers have ASO (Administrative Services Only) plans whereby they provide funds to an insurance company which then pays the appropriate claims. The employer must fund any shortfall and is entitled to any surplus funds accumulated by the insurance company administering the plan. Does an ASO plan such as this qualify as an insurance plan as described in paragraph 7 of IT-428?

b) Often certain groups of employees (eg. part-time employees) are required to make all of their own contributions to the plan. The amount of contributions required of the employees is established using prior claims history with a view to making this portion of the plan employee-funded but any shortfall or surplus is the responsibility of the employer.

As stated in paragraph 18 of IT-428, a plan to which some employees make all the required contributions will not be considered to be an employee-pay-all plan if the employer makes contributions for other members. Would Revenue Canada consider treating a plan such as that described as an employee-pay-all plan for part-time employees who are required to fund their own contributions?

c) If the answer to a) and b) are both no, is there any relief for the employee who funds his contributions out of after-tax dollars and is taxable on the full amount of benefits received out of the plan, including amounts which can be considered a return of premiums?

Department's Position

a) It is the self-insured arrangements which present the greatest challenge in determining whether there is an insurance element. The comments in paragraph 7 of Interpretation Bulletin IT-428 are intended to distinguish the situation where an employer is liable to pay an employee salary and wages during a period in which the employee is unable to work due to sickness or accident, from the situation where an employee's entitlement to benefits is only available through an insurance plan. As stated in paragraph 3 of Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"", a plan which consists of the following five 5 basic elements, namely:

an undertaking by one person,
to indemnify another person,
for an agreed consideration,
from the loss or liability in respect of an event,
the happening of which is uncertain,

will be considered to be a plan of insurance. Where an ASO plan administrator has the right and obligation to collect the annual contribution required of the employer, the plan will generally qualify as a plan of insurance. The annual contribution required of the employer is typically determined on an actuarial basis. If the contribution rate is set at an amount that is greater than the amount expected to be used in the current year to provide benefits, the employer's deduction for such contributions will be limited by subsection 18(9) of the Act.

b) The Department is prepared to treat that portion of a sickness and accident insurance plan in which the employees pay the entire cost of coverage under the plan as a separate plan from that part of the plan to which the employer makes a contribution provided that there is no cross subsidization between the two plans, and the level of benefits, premium rates, qualifications for membership and other terms and conditions of each of the plans are not dependent upon the existence of the other plan. In addition, the administration of the plans must indicate that each plan can be regarded as being separate from the other. Under an administrative services only plan, this would mean that the part-time employees would be liable for any shortfall required to fund benefits provided to the part-time employees under the plan and would be entitled to any surplus that might arise from that portion of the plan. Thus the scenario set out in your question would not be considered an employee-pay-all plan.

c) If the plan is determined to be other than a plan of insurance, the plan may be an employee benefit plan or employee trust as defined in subsection 248(1) of the Act and described in Interpretation Bulletin IT-502. An employer's deduction to an employee benefit plan is determined under section 32.1 of the Act. For an employee who has contributed to the plan, the amount included in income under paragraph 6(1)(g) of the Act is the amount received out of the plan less any amount that represents a return of that employee's contributions to the plan.

Author: A. Humenuk
File: 951021
Date: April 18, 1995
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