Health Trusts both Cost and Tax Effective

Overview

The health and welfare trust (HWT) is a benefit plan that allows its corporate sponsors to write off all contributions and provide key employees benefits for medical, long-term care and insurance.

A health and welfare trust can be structured to provide varying reimbursement limits to different classifications of employees.

The use of a health and welfare trust to make the pure insurance portions of critical illness premiums and long-term care premiums deductible allows a company to provide these benefits on a more cost- and tax-effective basis.

Rules & Regulations

The Canada Revenue Agency has issued various rulings concerning critical illness and long term care policies purchased by a health and welfare trust over the last 25 years:

  • Canada Revenue Agency’s Interpretation Bulletin sets out key requirements needed to constitute a health and welfare trust. It requires that benefits be restricted to one or more of the following: group sickness, accident insurance plans and private health service plans.
  • Canada Revenue Agency’s Technical Interpretations held that critical illness policies, which provide only critical illness coverage, would constitute an accident and sickness plan. A critical illness insurance policy held by a health and welfare trust is not considered a ‘life insurance policy’ and, therefore, is not a taxable benefit to an employee. A return of premium benefit payable on death, or at the expiry of the term of the coverage or after a certain claim-free coverage period, may result in the disallowance of tax deductions of all contributions to the HWT.
  • Under Canada Revenue Agency’s Interpretation Letter and subsequent Canada Revenue Agency letters, a group critical illness policy may be purchased, and where such a policy contained no provision for life insurance coverage or for a refund of all, or a portion, of the premiums paid on termination of the policy or on death of the insured employee, it is viewed as a legitimate investment by the plan resulting in no taxable benefits to the employees.

A similar situation applies with a long-term care policy, where such a policy would be a legitimate investment by the plan, providing it did not contain any return of premium benefits. Although the company may find riders highly attractive, should the premium for such riders be paid through a health and welfare trust, it invalidates the trust – it disqualifies the eligibility of all contributions made to the health and welfare trust.

Individual policies generally provide additional benefits (or riders) in the form of ‘return of premium’ benefits. Although the company may find riders highly attractive, should the premium for such riders be paid through the health and welfare trust, it invalidates the trust – it disqualifies the eligibility of all contributions made of the health and welfare trust.

The approach is to prepare a ‘split-dollar’ or ‘shared ownership’ agreement. The cost of pure insurance is funded through the health and welfare trust, and the company will pay the premiums for all of the various returns of premium benefits and riders. Care must also be taken to ensure that shareholder employees are eligible for such benefits and that a policy is issued on each life.

Group critical illness policies tend to be simpler than individual policies and can usually be issued without any return of premium benefits or riders.

The company should ensure the following:

  • The health and welfare trust has been properly set up and that no taxable employment benefits or shareholder benefits have been created;
  • The critical illness and long term care benefits constitute a group sickness and accident plan by purchasing either a group plan or series of individual plans that will be deemed part of the company plan; and
  • No ‘return of premium’ benefits or riders are funded through the health and welfare. If the company wishes to purchase these riders, it should have its employee benefit consultant prepare a split-dollar/shared ownership agreement. If the company does not require riders, the insurance company should be instructed to issue the policy as pure insurance.

Conclusion

If you have any question with respect to the above matter or any other income tax matters, please contact Joseph A. Truscott, Chartered Accountant at 905 528-0234 or e-mail Joe at joetruscott@josephtruscott.com.