Health and Welfare Trusts have been around for many years, and are now becoming an increasingly popular choice for providing medical coverage to employees – particularly in private companies. There can be significant tax advantages to using such a plan – both for the employer and the employee. The employer can save money on health insurance, and the employee can end up paying lower taxes. Designing an attractive benefits package can attract and retain desirable employees, and a Health and Welfare Trust can be a valuable tool.
A Health and Welfare Trust is an administrative term used by Canada Revenue Agency to refer to a trust used to provide medical and health services to employees. As long as the services provided are restricted to group sickness or accident insurance plans, private health services plans and group term life insurance policies, Canada Revenue Agency allows the employer to deduct reasonable payments to the trust, and does not impose a taxable benefit on the employee.
The trust is an “inter vivos” trust, which has to file an annual T3 trust return, and pays tax on any income earned in the trust at the highest personal tax rates. This means that there are some costs involved with setting up the trust, and with annual tax filing, but they are typically minimal. There is no requirement that an independent trustee be hired (and paid); the employer can be the trustee.
A Health and Welfare Trust can also be used as a private health services plan, similar to Blue Cross or other plans, whereby the trust pays the medical expenses of the employees directly, or reimburses employees for qualifying expenses. This course of action is attractive because when the trust is administering the plan, the administration costs involved in an outside private health services plan are not incurred. Since insurance companies are in business to make money, medical premiums must pay claims, all costs of running the company, and a profit to shareholders. If employee privacy is a concern, an independent plan administrator can be hired, typically for around 10% of the claim amounts.
The allowable medical expenses that a private health services plan can pay for are the same as the medical expenses that a taxpayer can deduct as medical expenses on their tax return. However, when a taxpayer claims medical expenses on their tax return, they receive a tax credit of 15.5% (federally) of the medical expense, even though they may have paid tax on the money spent at a higher rate. This means that a non-taxable reimbursement will always be more attractive for an employee who is above the minimum tax bracket. In addition, the eligible medical expense amount is reduced by 3% of the taxpayer’s net income (up to a maximum of $1,926 for 2007).
Most medical insurance plans have either a deductible or co-insurance amount. With a health and welfare trust, there is no requirement for either. This can be an additional attraction if the employer is trying to design a benefits package to attract and retain staff members.
If you think you might benefit from a health and welfare trust, your accountant can help you determine what the potential savings might be.