2012 Federal Budget Highlights—Group Benefit Plan Impact
The 2012 Federal Budget has proposed amendments which will have an impact on some employee benefits plans. In particular, there is a change to the income tax treatment of group sickness or accident insurance plans and to long-term disability plans for federallyregulated private sector employers.
Changes to Taxable Benefits Wording in the Income Tax Act
The budget indicates that, effective March 29, 2012, the Income Tax Act will be changed to “provide for more neutral and fair tax treatment of beneficiaries under a group sickness or accident insurance plan”. The budget states that employer contributions on non-periodic benefits in respect to a sickness or accident where there is no loss of employment income
(which include critical illness and accidental death and dismemberment (AD&D) coverage) will be taxable to the employee for income tax purposes.
Employer-paid premium for AD&D and/or critical illness coverage will now be included in an employee’s income (in the year in which the contributions are made). The following table outlines the current schedule of taxable benefits and the impact of the budget related changes:
When does this take effect?
It becomes effective for contributions made on or after March 29, 2012 (budget day) that relate to coverage starting in 2013. The amendment means employees are subject to tax on the employer contributions as of this date to the extent that contributions relate to coverage after 2012. In other words, contributions made for coverage in 2013 under a group sickness and accident insurance plan will be included in the employee’s income for 2013, even if these contributions are made between March 29, 2012, and December 31, 2012. This prevents employers from moving forward 2013 contributions in order to take advantage of the final year of tax sheltering.
Employer premium allocation
Where employer contributions are used to pay for AD&D and/or critical illness, it will result in a taxable benefit to the employee. It may be important for organizations to look at their flex benefit allocations based on this change. This is particularly the case for employer-provided flex credits to a flex plan where flex payroll systems will need to be updated in
order to provide the correct income tax calculations, enrolment information and payroll information.
There is an impact only on federal income tax. Quebec provincial income tax already considers AD&D, critical illness, health care and dental care insurance premiums paid by employer as taxable benefits.
Long-term disability plan for federally regulated private sector employers
The Government proposes to introduce legislation to require federally regulated private sector employers to insure, on a go-forward basis, any long-term disability plans they offer to their employees. This will impact employers in banking, transportation, communication and other federally regulated industries that provide self‑insured arrangements.
This amendment is to prevent situations such as the one Nortel disabled employees faced due to Nortel’s health and welfare trust being only partially funded. As a consequence, they will only receive a small fraction of their disability payments in the future.
We suggest that you review the above information and obtain guidance from an expert/advisor for further advice specific to your situation.