One of the many lessons learned during the pandemic is that we must be receptive to change. Despite handling hundreds of accident benefit files, a claims adjuster should be diligent and manage potential changes in previously calculated income replacement benefit (IRB) calculations of an injured insured.
As accountants experienced in accident benefits, our clients often ask when they should be updating IRB calculations. Below, we present the top 10 reasons to update the calculation of an IRB.
Probably the most obvious reason to warrant an update to an IRB calculation would be if the claimant either returns to work in reduced capacity, if they were off completely from work since the onset of the accident, or if they continued working after the accident and then subsequently cease working completely or work in a reduced capacity. It's important to be cognizant of the many reasons why a claimant's working capacity could change.
Consider the case of a claimant who continues to work at their self-employment after the accident in a reduced capacity up until the date of a scheduled surgery and then does not work in any capacity while they are recovering. There would be a change in the revenues of their self-employment from some to none, which would likely result in different IRBs owing in each of these periods due to post-accident income (s.7(3)(b) of the Statutory Accident Benefits Schedule) and possibly post-accident losses (s.7(2)(2) of the SABS), respectively.
Consider the case of a claimant who, as a result of the accident, receives 100% sick pay or short-term disability (STD) benefits for four weeks, then 75% STD benefits for another 12 weeks before finally receiving 67% long-term disability (LTD) benefits thereafter. Since each step would result in a change in the amount of collateral benefits being received and, therefore, deductible in the IRB calculation (s.(7(1)(“A”) of the SABS), you may want to diarize the dates of the anticipated changes in the collateral benefits being received and update the IRB calculations accordingly.
Although more prevalent alongside a claimant's receipt of LTD benefits, the retroactive receipt of CPP disability benefits will more than likely change the quantum of a previously calculated IRB as well as future IRBs. That's because CPP disability benefits are generally received on a retroactive basis for multiple years and are indexed on an annual basis.
When additional wages have been incurred—such as through the hiring of a replacement worker or through the increased efforts of the existing workers—the claimant's business experiences a change in expenses incurred, compared to those incurred prior to the accident. As a result, it usually warrants a change in the quantum of the IRB. Conversely, the same could hold true in situations when salaries and wages or subcontract labour decrease or cease as a result of the accident.
Although paragraph 7(2)(2) of the SABS provides for the addition of 70% of weekly post-accident losses from self-employment incurred as a result of the accident in the calculation of an IRB, the SABS does not provide complete, explicit guidance on how to calculate these losses.
As a result, one of the questions that remains is how long do we allow for the addition of post-accident losses from self-employment in the calculation of an IRB when a self-employed claimant remains off work for several months or years?
Since post-accident losses are generally the result of the reduction in the revenues of the business and the incurrence of ongoing, business-related expenses after the accident, it may appear reasonable to assume that post-accident losses should continue to be incurred as a result of the accident until the end of the taxation year of the business for the year in which the accident occurred.
This approach would recognize that some expenses may be under contract until the end of a taxation year and would allow claimants time to cease or mitigate their losses by restricting their business-related expenses to only those that are reasonable and necessary to keep their business going thereafter in order that they may return to it when they have recovered from their injuries sustained in the accident. The foregoing changes in expenses may necessitate an update to the calculation of the IRB.
As a reminder, self-employed sole proprietors have taxation years ending Dec. 31, whereas corporations can select any day of the year, but typically select the end of any given month.
Employed-only claimants are required to file and report their income for a particular year on their personal income tax return by April 30 of the following year, self-employed claimants by June 15 of the following year, and those claimants who operate their business through an incorporated company have until six months following the year-end of the company.
Accordingly, and in combination with the provisions of subsections 4(5) and 4(6) of the SABS, any of the foregoing incomes not reported to the Canada Revenue Agency (CRA) by their respective tax filing deadlines shall be excluded from the calculation of a claimant's pre-accident income from employment/self-employment until such time that said income is reported to CRA.
As a result, IRB calculations made predicated on pre-accident income for which there was not yet a requirement that it be reported to the CRA should be revisited after the applicable filing deadline to see if adjustments are required in this regard.
Since IRB calculations should be made quickly using the best information available at the time, it's not uncommon for the calculation of a self-employed claimant's 2022 post-accident income or losses for an accident that occurred in December 2021 to be predicated on the expenses deducted on their 2020 tax return because it was the latest return available when the calculation was made.
However, if a claimant remains on claim and as soon as their 2021 tax return becomes available, it may be a good time to update the calculation using the most current information contained in their 2021 return because expenses are subject to change year over year.
For some claimants, the injuries sustained due to their accident prevent them from being able to continue in their chosen occupation for a period of time. As a result, they are sometimes forced to take on other forms of employment or self-employment to make ends meet. For example, they may take on temporary self-employment as an Uber driver where they can sit and take breaks or seek temporary employment through a placement agency. The resulting changes in post-accident employment/self-employment income would warrant an update to the calculation of their IRB.
If a pre-accident, low-income earning claimant is still on claim after the end of their first 104 weeks of disability, it's possible the provisions of paragraph 6(2)(b) of the SABS (often referred to as the policy minimum) will apply wherein 70% of the claimant's pre-accident weekly income is increased to $185 if 70% of their pre-accident weekly income was previously calculated to be less than $185. Accordingly, the calculation of this claimant's IRB should be updated in this regard, pursuant to subparagraph 7(2)(1)(ii) of the SABS.
When a claimant who is already receiving an IRB is about to turn 65, it's time to start considering whether the adjustment stipulated under subsection 8(1) of the SABS—which in essence converts the IRB payable into a pseudo pension payable until death—will come into effect. The weekly amount of the benefit is adjusted on the later of the day of the person's 65th birthday and the second anniversary of the day the person began receiving the benefit.
When a claimant first became entitled to receive an IRB on or after their 65th birthday, it's important to note the ramp down dates for the reductions to be made to their IRB as stipulated under subsection 9(2) of the SABS. After the first 51 weeks of payments, their IRB is adjusted by a factor of 0.8 and then by 0.6, 0.3, and 0.0 immediately following the end of each 52-week period. After the end of their first 207 weeks of payments, their IRB is $0.
Of course, it's also important to bear in mind that you may have to simultaneously adjust the IRB of a claimant who was on or over the age of 65 at the time they first became entitled to receive their IRB to reflect the post-104-week adjustment to $185, subject to the ramp down beginning with 0.6.
The bottom line
There are many reasons or circumstances that warrant an update to a previously calculated IRB, oftentimes more than once for the same claim. Therefore, it can be an arduous task to keep track of these situations for all your files.
As a rule of thumb, it may be prudent to revisit each file on at least a quarterly basis to determine whether any of the foregoing items are relevant and may necessitate an adjustment to the calculation of the IRB.
How BDO can help
We've helped many clients determine whether they should be updating IRB calculations. We're available to assist with any questions you may have over the course of the life of a particular claim for IRBs.