As many players in the employee benefit plan industry know, the tax rules applicable to Employee Life and Health Trusts (ELHTs) are complicated. In recent years, the industry has undergone transition as Health and Welfare Trusts (HWTs) converted to ELHTs because of changes to federal income tax rules. We are now learning that the Ontario Ministry of Finance (MoF) is conducting reviews of ELHTs and this has resulted in many ELHTs assessing their compliance with their Ontario insurance premium tax—or premium tax—obligations.
Historically, in the context of benefit plans, premium tax was a 2% tax applied to insurance companies on insurance premiums for life, accident, or sickness insurance. In 1996, the Ontario government amended the tax rules to include premium tax on benefits provided directly through an ELHT.
While the rules can be complex, the simple explanation is if an ELHT qualifies as a funded plan, the 2% premium tax is applied to its contributions. If it is an unfunded plan, the tax is applied to the benefits. A plan is considered funded if it receives contributions that exceed the amounts required for benefits within 30 days.
Millions of Ontario residents obtain health benefit coverage through multi-employer ELHTs that are affiliated with a unionized workforce. Given the unique nature of multi-employer benefit plans in which contributions into the ELHT are a per-hour amount—or percentage of pay— that covers all components of benefit coverage, many funds historically took the position that they met the criteria to be an unfunded plan. This determination was made based on the specifics of the plans. However, it was generally accepted that the circumstances of a multi-employer plan arrangement were much different than a single-employer arrangement. For example, many plans provide a level of subsidized benefits to members in retirement, therefore a component of the benefit plan contribution is required to accumulate over time to fund the actuarially determined obligations for these benefits. The definitions of funded or unfunded plans do not contemplate these factors.
In recent months, MoF appears to be clarifying their position through their review processes that the definition of a funded plan is simply met by contributions exceeding the amounts required for payment of benefits within 30 days. This has resulted in many plans now assessing if they are meeting their premium tax remittance requirements.
However, there is another factor that needs to be considered in assessing the fairness of premium taxes related to ELHTs.
In 2010, certain auto manufacturers ran into financial hardship and one of the solutions was to allow the companies to make lump sum payments to ELHTs to allow them to remove the employee future benefit obligations from the corporate balance sheets. To facilitate this, the Ontario government introduced qualifying trust rules which, amongst other things, allowed the ELHTs to elect to be treated as an unfunded plan for retail sales tax and premium tax purposes. The effect being that premium tax may be remitted based on benefit payments rather than contributions.
As the payment of premium tax is a use of cash of the ELHT, the timing of the payment impacts the ELHT when considering the time value of money. In essence, if the ELHT can save money today and invest it, the fund will have more money later to provide benefits. The fact that some ELHTs can defer the payment of premium taxes and others are required to pay on the contributions into the ELHT results in an inherent tax unfairness.
There is a simple solution for the Ontario government—allow all multi-employer plans affiliated with the unionized workforce to elect to become unfunded plans. This will allow them to remit premium taxes on applicable benefits paid and will result in tax fairness and level the playing field with respect to the application of premium taxes.
Until such legislative changes are contemplated, we encourage ELHTs to assess their premium tax obligations.
If you have questions on how to make a submission under the voluntary disclosure program to minimize penalties, or if you require assistance with an ongoing audit, please contact us.