Module 3 - Managing Short-Term Income Replacement Benefits

Question 1

Outline the purpose of an income replacement plan.

Answer 1

An income replacement plan protects against loss of income when someone is absent from work because of an illness or injury. Income replacement coverage falls along a continuum, providing protection for occasional, short-term and long-term absences.

Question 2

Contrast the level of income protection provided by sick leave plans, salary continuance plans and weekly indemnity/short-term disability (WI/STD) plans in the event of absence from work due to an illness or injury.

Answer 2

Sick leave plans apply to both salaried and hourly paid employees. They provide full pay for absence from work due to sickness or injury for a short period—that is, from a few days to up to two weeks or longer, depending on the plan sponsor. Salary continuance plans usually apply only to salaried employees. They usually provide benefits for the full period of short-term absence due to sickness or injury up to the end of the elimination period (also called a qualifying period) under the plan sponsor’s long-term disability (LTD) plan (or for a set maximum number of weeks when there is no LTD plan). WI/STD plans may apply to both salaried and hourly paid employees. They typically pay benefits on the first day if the disability is due to an accident or hospitalization. If due to illness, plans typically have an elimination period of three to seven days before benefits start. Most WI/STD plans pay a percentage of earnings, such as 60% or 67%, and have a maximum weekly benefit amount. The maximum benefit duration usually ranges from 15 to 26 weeks.

Question 3

Identify the main sources of short-term income replacement benefits and explain why coordination of government-sponsored benefits with group benefits is an important plan design consideration.

Answer 3

The main sources of short-term income replacement benefits are group plans, including sick leave, salary continuance and/or WI/STD plans, as well as government-sponsored plans, including Employment Insurance (EI), Workers’ Compensation (WC) or Canada Pension Plan/Quebec Pension Plan (CPP/QPP), which also provide short-term income replacement (WC and CPP/QPP can also provide long-term income protection). It is important to coordinate government-sponsored plans with group benefit plans to ensure that the benefits disabled plan members receive do not exceed their normal predisability income, avoiding a disincentive to return to work.

Question 4

Describe the basic characteristics of government-sponsored WC, EI and CPP/QPP income replacement benefits: WC

Answer 4

Benefits only cover work-related illness and injury. WC provides tax-free benefits from the date of disability to return to work.

Question 5

Describe the basic characteristics of government-sponsored WC, EI and CPP/QPP income replacement benefits: EI

Answer 5

Illness and injury do not need to be work-related. Taxable benefits start after one week and are payable for up to 15 weeks. The benefit is capped at 55% of maximum weekly insurable earnings. Individuals must meet eligibility requirements regarding work history and EI contributions.

Question 6

Describe the basic characteristics of government-sponsored WC, EI and CPP/QPP income replacement benefits: CPP/QPP

Answer 6

Benefits only cover disability that is severe and prolonged. Taxable benefits start after four months and are payable until CPP/QPP retirement pension begins. Benefits are available for claimants and each dependent child. Special benefits apply for disabilities that commence after receipt of CPP/QPP retirement benefits, payable up to age 65. Individuals must meet eligibility requirements regarding CPP/QPP contributions.

Question 7

Describe the level of income protection provided by a sick leave plan.

Answer 7

Sick leave plans apply to both salaried and hourly paid employees. These plans typically provide full pay with the applicable payroll deductions (income tax, CPP/QPP contributions, EI premiums and union dues) for absences from work caused by sickness or injury for a short period. A plan member may be able to accumulate a defined number of sick leave hours per day or per month, to a maximum amount.

Question 8

Explain the differences between informal sick leave plans and formal sick leave plans.

Answer 8

Under informal sick leave plans, the provisions are not documented in a formal policy; therefore, it is difficult to define precisely the classes of group members that qualify or the extent of the benefits provided. Adjudication of a claim is minimal, and a doctor’s note may be required after a few days’ absence.

Formal plans, which are more common in the public sector and with larger private sector employers, describe the provisions either in the employment agreement (e.g., collective agreement) or in a human resources policy. There tends to be little uniformity in plan design and wording among formal sick leave plans. However, typically the plan member remains on full pay during the sick leave period.

Question 9

Outline factors a plan sponsor considers when designing a sick leave plan.

Answer 9

Factors a plan sponsor considers when designing a sick leave policy are:

(a) The number of days of sick leave granted each year to various classes of plan members

(b) Whether new plan members must complete a minimum service period before becoming eligible for sick leave

(c) When sick leave is granted on a calendar year basis, the number of days of sick leave allowed in the first year of employment

(d) The amount payable during the sick leave (if other than the plan member’s full pay, less deductions for income tax, EI, pension plan, CPP/QPP, group benefits contributions, union dues)

(e) Whether/what evidence of illness or injury plan members must provide, including when and how frequently (e.g., a doctor’s note after a few days’ absence)

(f) Whether sick leave is available for nonemergency doctor or dentist appointments

(g) Method of notifying the plan sponsor when plan members require sick leave

(h) How many unused sick days, if any, plan members can carry over into the next year and the maximum number of days plan members can bank.

Question 10

Explain how sick leave plans are funded.

Answer 10

Both informal and formal sick leave plans are uninsured coverage. The plan sponsor provides the coverage at no cost to plan members. The plan sponsor accepts full liability for funding the sick leave pay—that is, it is a self-insured benefit. The plan sponsor does not establish a fund to cover any potential financial liability.

Question 11

Identify the types of sick leave plans that are subject to the accounting standards in Sections 3462 and 3463–Employee Future Benefits of the Chartered Professional Accountants (CPA) Canada Handbook or the requirements in International Accounting Standard (IAS) 19 Employee Benefits for publicly traded companies: List

Answer 11

Sick leave plans subject to the accounting standards in Sections 3462 and 3463– Employee Future Benefits of the CPA Canada Handbook or the requirements in IAS 19 Employee Benefits for publicly traded companies include:

1. Sick leave plans that vest.
2. Sick leave plans that accumulate beyond 12 months after a plan sponsor’s fiscal year.
3. Sick leave plans that accumulate and are paid without an illness-related absence.

Question 12

Sick leave plans that vest

Answer 12

Benefits vest when the right to receive the benefit is no longer conditional on continued employment. If plan members are paid all or part of their unused sick leave in a lump sum when they retire or terminate employment, benefits must be accounted for on an accrual basis (i.e., a liability equal to the present value of expected future payments must be recognized in the plan sponsor’s financial statements when the plan member becomes entitled to receive the benefits, not when the payments are made). A plan is exempt from the accounting requirements if there is no payment of any kind made when the plan member terminates employment or retires

Question 13

Sick leave plans that accumulate beyond 12 months after a plan sponsor’s fiscal year.

Answer 13

If plan members can carry forward benefits that accumulate to one or more periods after the period in which they earned them, even if there is a limit on the amount that can be carried forward, benefits must be accounted for an accrual basis. If the plan includes an annual buyback provision or if the unused sick leave can only be carried forward to the next year, the plan is exempt from the accounting requirements. A buyback provision is a yearly cash bonus based on a plan member’s unused sick leave days for the year and is not commonly used by plan sponsors.

Question 14

Sick leave plans that accumulate and are paid without an illness-related absence.

Answer 14

This includes plans that allow plan members to use their unused sick days only immediately prior to retirement and plans that allow a cash payment to be made to the plan member at any time (not an annual buyback provision). These plans must be accounted for on an accrual basis.

Question 15

Describe considerations that influence a plan sponsor’s decision regarding the maximum number of days that can be accumulated when establishing a paid sick leave policy.

Answer 15

This plan design feature can have a significant impact on absence behaviour, unused entitlements and the cost of sick leave plans. It is important to consider the intent of a sick leave plan when setting the maximum number of days: sick leave is a benefit available to plan members when they are too sick to come to work, not an entitlement to time off that accumulates if plan members do not need sick days. If the maximum number of days is too low, the plan will not adequately protect plan members who have lengthy, though temporary, absences. If plan members perceive the maximum as being higher than what they need for protection in the event of a genuine disability, this may encourage casual absenteeism among those who have accumulated their full sick leave entitlement and would otherwise get no benefit from the days accrued. Further, sick day entitlement that accumulates beyond 12 months after a plan sponsor’s fiscal year may create a sizable unfunded financial liability at career end that the plan sponsor must pay out.

Question 16

Explain how plan design is a key tool for managing absenteeism, unused entitlements and the cost of sick leave plans.

Answer 16

An efficient and effective approach is to design the sick leave plan in combination with other short-term income replacement plans and/or LTD plans and government sponsored plans such as EI. An integrated design also makes it feasible to limit the accumulation of sick leave days to a reasonable maximum and minimize the problem of unused entitlements (and accounting liabilities) while at the same time reducing the cost of the sick leave plan.

Question 17

Outline the characteristics of a salary continuance plan.

Answer 17

Salary continuance plans provide coverage to plan members for short-term absences from work. The plan sponsor is typically the employer, and the plan member is an employee. These plans typically cover only salaried employees. Benefits are paid through payroll and have historically involved minimal adjudication of the plan member’s claim. Often, a note from a doctor is adequate to substantiate the absence from work; substantiation is generally not required for absences of fewer than three consecutive working days. Many salary continuance plans are informal, with the plan sponsor setting the availability, amount and duration of benefits at its discretion. While formal plans are becoming more common, some plan sponsors still use informal plans to provide coverage for their executives or, if they are small employers, to provide coverage for their salaried employees.

Salary continuance plans usually provide benefits for a full specified period of short-term disability up to the end of the elimination period to qualify for benefits under the LTD plan (or a set maximum number of weeks where there is no LTD coverage), regardless of the plan member’s length of service. Plans sponsors typically design plans to provide a smooth transition to LTD with no gap in coverage. A 17-week benefits schedule is common because this (a) allows a plan sponsor to qualify for an EI premium reduction if the formal plan meets certain requirements and (b) allows earlier involvement of the insurer in managing the claim should it transition to LTD. Benefit schedules can be tiered; plan members receive full salary for a specified number of weeks, followed by a lower percentage of salary for the balance of the salary continuance period. Tiered benefits schedules may or may not be service-related.

Question 18

Outline factors a plan sponsor considers when designing a salary continuance plan.

Answer 18

Factors a plan sponsor considers when designing a salary continuance plan are:

(a) The number of weeks of salary continuance granted

(b) The classes of plan members covered (typically, salary continuance plans cover only executives and salaried employees)

(c) The service requirement thresholds for progressively longer periods at full salary, if the benefit level is service-related

(d) The benefits level after a plan member has utilized full entitlement at 100% of salary if the plan has a tiered benefits schedule

(e) Whether/what evidence of illness or injury the plan member must provide, including when and how frequently

(f) The method of notifying the plan sponsor if a plan member is absent from work and requires payment of salary continuance benefits

(g) The effect of a recurrent disability for the same or related causes on the plan member’s benefit entitlement

(h) Whether the plan design should meet the requirements for EI premium reduction.

Question 19

Explain how salary continuance plans are funded.

Answer 19

Salary continuance plans are not insured and are provided at no cost to the covered plan members. The plan sponsor accepts full liability for the funding of the benefits, that is, it is a self-funded (or self-insured) benefit.

Question 20

Outline plan design and claims adjudication considerations in managing absence and the cost of salary continuance plans.

Answer 20

Plan sponsors pay salary continuance benefits only in the event of disability—it is a use-it-or-lose-it benefit. The major plan design considerations are the benefits schedule and benefit duration. Claims adjudication is a more significant issue for salary continuance plans than for sick leave plans. With privacy legislation and the increasing complexity of disability claims, more plan sponsors are accessing third-party services to help adjudicate and administer disability claims. While a self-administered salary continuance plan can be more cost-effective for plan sponsors (compared to an insurer-administered program that incurs external administration charges), for more complex claims, many plan sponsors prefer to defer to claims adjudicators with more expertise. Using a third-party adjudicator also provides increased impartiality in the decision-making process and could have a favourable impact on the amount of salary continuance benefits paid through shorter claims durations. While some plan sponsors refer claims selectively to third-party providers—for example, referring only complex claims, such as those with a psychological component, and/or claims of longer duration—this practice can be perceived as discriminatory. For this reason, plan sponsors may decide to refer all claims that exceed a prespecified duration.

Question 21

Outline the characteristics of a WI/STD plan.

Answer 21

WI/STD are formal income replacement plans that typically have an elimination period of at least three days before benefits start. The length of the elimination period usually depends on whether the disability is due to illness or accident, and sometimes on whether the plan member is confined in a hospital. In case of accident or hospitalization, benefits are often paid from the first day. Most plans pay a percentage of the plan member’s predisability gross earnings, usually in the range of 55% to 70%, and plans have a maximum weekly benefit amount and a maximum benefit duration. WI/STD plans may be funded by the plan sponsor (self-insured) or insured. Self-insured plans typically pay benefits through payroll.

Question 22

Identify the key distinctions between WI/STD plans and salary continuance plans.

Answer 22

The key distinctions between WI/STD plans and salary continuance plans are that salary continuance plans typically pay from the first day of disability and may also pay full salary for an initial period of disability. In contrast, WI/STD plans have an elimination period of at least three days before paying benefits and do not pay benefits at 100%.

Question 23

State the usual definition of “disability” in a WI/STD plan.

Answer 23

Plan members are generally considered disabled under the terms of the plan if they are unable to perform any or all aspects of their regular occupation due solely to sickness or accidental injury. Common practice is to assess whether the plan members can perform the essential duties of the job. Benefit payments are usually subject to other requirements, including not being employed in any other work for remuneration or profit and being under the appropriate care of a physician.

Question 24

Discuss factors that impact the length of the elimination period in a WI/STD plan.

Answer 24

Payment of WI/STD benefits usually begins after a specified number of days, known as the “elimination period” or “qualifying period.” The length of the elimination period usually depends on whether the disability is due to illness or accident and sometimes on whether the plan member is confined to a hospital.

Question 25

Explain the primary reason for imposing an elimination period before benefits begin in a WI/STD plan.

Answer 25

The primary reason for the elimination period is to avoid the inefficiency of paying benefits for absences of only a few days’ duration. A medical practitioner must sign each WI/STD claim form and a claims adjudicator must review it. The elimination period discourages casual absences for trivial health complaints and ensures that the plan operates as an insurance plan, with claims dollars being directed to cover income losses that individuals cannot afford (i.e., the plan satisfies the five characteristics of an insurable risk).

Question 26

Identify the maximum amount of time for which WI/STD benefits are paid as well as the most common maximum benefit periods.

Answer 26

Benefit durations generally range from 15 to 26 weeks (but occasionally for as many as 104 weeks). A 15-week maximum aligns with the minimum requirements for the plan to qualify for EI premium reduction.

Question 27

Describe factors that influence the benefit amount typically provided in a WI/STD plan.

Answer 27

The benefit amount payable in a WI/STD plan is generally intended to replace 75% to 85% of net earnings. This provides plan members with a financial incentive to return to work quickly and recognizes that, when not at work, regular expenses are generally lower. The benefit schedule is generally based on a percentage of the plan member’s predisability weekly gross earnings (usually in the range of 55% to 70%). For unionized or hourly workers, the schedule may list various classes based on weekly earnings ranges or position classifications and provide a flat dollar benefit amount to each class. The amount of benefit payable rarely relates to the plan member’s length of service, except indirectly to the extent the plan member’s earnings reflect length of service.

Question 28

Explain why the tax status of the WI/STD benefit is an important consideration when determining the benefit schedule.

Answer 28

Unless the plan member is paying the entire WI/STD premium, the benefit is taxable. To provide a comparable level of after-tax income replacement, it is necessary to base a taxable WI/STD plan on a higher percentage of the plan member’s predisability gross earnings, compared to a nontaxable WI/STD plan.

Question 29

Explain the application of evidence of insurability and maximums to WI/STD benefits.

Answer 29

WI/STD benefits are not subject to evidence of insurability and therefore not subject to nonevidence maximums. Benefits are subject to overall maximums, ranging from $500 to $2000 per week, depending on the size of the group and earnings levels. Some plans mirror the EI benefit maximum. These plans must update their WI/STD maximum annually since the EI maximum typically increases each year.

Question 30

Explain why integrating WI/STD benefits with CPP/QPP disability benefits is not a critical plan design consideration.

Answer 30

The goal of integration is to ensure that that the benefits disabled plan members receive do exceed their normal pre-disability income. The benefit period duration of WI/STD disability benefits is generally relatively short. Integration of WI/STD benefits with CPP/QPP disability benefits does not arise when the group plan benefit period is 17 weeks or less, because CPP/QPP benefits do not begin until at least the end of the fourth month of disability (with payments typically beginning months later due to the lengthy adjudication process).

Question 31

Explain how WI/STD benefits are integrated with WC benefits.

Answer 31

WI/STD plans may be written on a nonoccupational basis (i.e., these plans do not cover disabilities that WC covers). WI/STD plans that cover occupational injuries generally include a provision for integration with WC (i.e., WC benefits are an offset under the WI/STD plan). The usual result is that no benefit is payable from the WI/STD plan, since the minimum temporary disability benefit from WC is usually greater than the benefit payable in a WI/STD plan.

Question 32

Explain how successive periods of disability are usually treated in a WI/STD plan.

Answer 32

Under WI/STD plans, successive periods of disability due to the same or related causes (i.e., recurring illnesses) usually constitute a single period of disability, unless they are separated by a specified period of regular work (usually two consecutive weeks). Successive periods of disability due to entirely unrelated causes are treated as a single period of disability unless the plan member has returned to work (usually for one full day). When any period of disability is treated as a continuation of an earlier period of disability, benefits recommence without an elimination period and are payable for up to the remaining balance of the benefit period.

Question 33

Identify the types of exclusions and limitations usually included in WI/STD plans.

Answer 33

In most WI/STD plans, no benefits are payable for:

(a) Any period during which the claimant is not under the appropriate care of a physician

(b) Any period during which the claimant is engaged in any occupation for remuneration or profit, except as approved by the insurer (e.g., for rehabilitation purposes)

(c) Any period during which the claimant is receiving EI maternity or parental benefits

(d) Any period during a strike or the scheduled duration of a leave of absence or layoff if the disability commenced after the beginning of the strike, leave of absence or layoff

(e) Any period during which the claimant is confined in a penal institution or correctional facility

(f) Disabilities resulting from participation in an insurrection or riot or in the commission of, or attempt to commit, any criminal offence

(g) Disabilities suffered as a result of an act of war, whether declared or undeclared

(h) Disabilities resulting from an intentionally self-inflicted injury or attempted suicide.

Question 34

Describe general approaches for funding WI/STD benefits for small, midsized and large groups.

Answer 34

Plans for smaller groups (i.e., up to 150 lives) are usually insured on a nonrefund accounting basis, either fully pooled or prospectively rated. The claims experience of these groups is not predictable. With such a small spread of risk, these groups are not suitable for any form of aggressive risk sharing or for self-insuring, from the point of view of either the plan sponsor or the insurer.

Plans for midsized groups (i.e., 150 to 500 lives) may be insured on a nonrefund accounting basis, prospectively rated, or the plan sponsor and insurer may accept some risk sharing under a refund accounting basis.

Plans for larger groups (i.e., 500 lives and over) have traditionally been more likely to be self-insured, possibly using an administrative services only (ASO) arrangement. However, as benefits paid under a self-insured WI/STD plan are subject to payroll taxes, an increasing number of plan sponsors are changing from self-insured to insured refund accounting arrangements.

Question 35

Outline the accounting requirements that apply to WI/STD plans.

Answer 35

WI/STD and LTD plans are included under postemployment benefits under Section 3462 and 3463–Employee Future Benefits of the CPA Canada Handbook and IAS 19 Employee Benefits for publicly traded companies. However, under most WI/STD plans, the benefit is earned and paid within 12 months and, therefore, these plans do not require actuarial valuations of their liability. However, if any benefits from these plans are not service-related (which is the norm for WI/STD plans), the plan sponsor must recognize at its measurement date whether there are plan members receiving the benefits, unless the significant risks of the plan have been transferred to an insurer through an insurance arrangement. If the significant risks have been transferred, the liability is limited to any outstanding premiums at that time. If the plan sponsor has not transferred the significant risks (i.e., it is a self-insured plan), the plan sponsor’s financial statements must include a liability if any disability benefits were being paid at that time (i.e., at the end of the financial statements’ accounting period). The liability is the present value of all future expected disability payments for members disabled on or before the measurement date (usually referred to as a “disabled lives reserve”). The expense is the benefits payable during the accounting period plus the change in the disabled lives reserve.

If any benefits from these plans are service-related (rare for WI/STD plans), the accounting standards require accrual of the liability over the plan member’s service with the plan sponsor. If the significant risks have been transferred to an insurer, the liability is limited to any outstanding premiums.

Question 36

Outline strategies for managing absence and the cost of WI/STD plans.

Answer 36

Strategies for managing absence and the cost of WI/STD plans include:

(a) Clearly documented policies and procedures for reporting absences

(b) Completion of relevant documentation on a timely basis

(c) Management of individual claims by qualified case managers

(d) Early intervention to facilitate appropriate and timely treatment and rehabilitation, which can minimize work absence and prevent a WI/STD claim from becoming an LTD claim

(e) Chronic or episodic illness management (e.g., targeted education programs, medication adherence programs and care guides)

(f) Return-to-work program that starts when a plan member goes on STD and is integrated with the LTD plan

(g) Accommodating return to work as soon as the plan member is medically cleared

(h) Tracking key metrics (e.g., STD claims incidence, median and average claims payments, claims reaching maximum benefit duration, calendar days lost)

(i) Communicating with the plan member to maintain contact.

Question 37

Outline some of the requirements a salary continuance or WI/STD plan must meet to qualify for EI premium reduction.

Answer 37

Service Canada sets the EI premium reduction each year, and its EI Premium Reduction Guide outlines requirements to qualify for premium reduction. The plan sponsor must register the plan with Service Canada. In addition, the WI/STD benefits the plan sponsor provides must be equivalent to or better than the EI benefit (i.e., the plan must provide at least 15 weeks of benefits at 55% of weekly earnings). Plan sponsors must take these requirements, and others outlined in the guide, into account when making plan design decisions.

Question 38

Explain why it is more advantageous for a plan member to receive sickness benefits from a WI/STD plan than from EI.

Answer 38

It is more advantageous for a plan member to receive sickness benefits from a WI/STD plan than from EI because, in addition to EI premium savings (shared with plan members), if a disabled plan member is unable to return to work after receiving the maximum duration of WI/STD benefits, and no further income replacement plan (such as LTD) is available, the plan member can then apply for EI sickness benefits and may continue to receive disability benefits for another 15 weeks.

Question 39

Describe options available to plan sponsors for integrating their salary continuance or WI/ STD benefits with EI sickness benefits, and identify which options qualify for EI premium reduction: List

Answer 39

Nonintegrated plan

Supplementary unemployment benefit (SUB) plan

Carve-out or wrap-around plan

Question 40

Describe options available to plan sponsors for integrating their salary continuance or WI/ STD benefits with EI sickness benefits, and identify which options qualify for EI premium reduction: Nonintegrated plan

Answer 40

Under a nonintegrated plan, the salary continuance or WI/STD plan is the first payer and EI is the second payer. A nonintegrated plan may qualify for EI premium reduction if it meets the registration requirements (e.g., the benefit amount must be at least 55% of a plan member’s insurable earnings (or the maximum EI benefit, if lower), payable for a minimum 15-week period.

Question 41

Describe options available to plan sponsors for integrating their salary continuance or WI/ STD benefits with EI sickness benefits, and identify which options qualify for EI premium reduction: Supplementary unemployemnt benefit (SUB) plan

Answer 41

A SUB plan tops up EI sickness benefits and therefore does not qualify for EI premium reduction. A SUB plan may or may not pay full WI/STD benefits during the EI waiting period. Benefits are not payable until the plan member provides proof that they have applied for and are receiving EI sickness benefits.

Question 42

Describe options available to plan sponsors for integrating their salary continuance or WI/ STD benefits with EI sickness benefits, and identify which options qualify for EI premium reduction: Carve-out or wrap-around plan

Answer 42

The salary continuance or WI/STD benefit can be integrated with the EI benefit in two ways:

The EI benefit can be “carved out.” In other words, the salary continuance or WI/STD plan pays benefits for the periods before and after the EI benefit period (e.g., from days one to seven and after the 15-week EI benefit period).
Alternatively, the salary continuance or WI/STD benefit can be “wrapped around” the EI benefit. Like the carve-out plan design, a wrap-around plan pays benefits for the periods before and after the EI benefit. However, if EI declines to pay benefits for the 15-week period, a salary continuance or WI/STD plan with a wrap-around feature pays benefits for that 15-week period as well (subject to satisfying the definition of “disability”). Neither a carve-out nor wrap-around plan qualifies for EI premium reduction because the EI benefit is payable for 15 weeks.

Question 43

Explain how IT-428, Wage Loss Replacement Plans defines a wage loss replacement plan.

Answer 43

A wage loss replacement plan is any arrangement between an employer and employees, or between an employer and a group or association of employees, under which provision is made for indemnification of an employee, by means of benefits payable on a periodic basis, if an employee suffers a loss of employment income as a consequence of sickness, maternity or accident. This arrangement may be formal in nature, as evidenced by a contract negotiated between an employer and employees, or it may be informal, arising from an understanding on the part of the employees that the employer would provide wage loss replacement benefits.

Question 44

Explain the impact of the employer/employee contribution decision on the tax status of a disabled plan member’s WI/STD benefits.

Answer 44

Based on IT-428, Wage Loss Replacement Plans, benefits received by the disabled plan member are not taxable if the plan is considered an employee-pay-all plan. To be considered an employee-pay-all plan, employees enrolled in the plan must pay the entire premium as the plan’s terms require, or the terms of the plan must clearly establish that it is intended to be an employee-pay-all plan. The plan is an employee-pay-all plan even if an employer pays the premium on behalf of a disabled employee during an elimination period for benefits; during this period, there would normally be no salary or wages from which to deduct the premium contribution. Plan sponsors must report the amount of the paid premium as taxable income to the disabled employee to maintain the employee-pay-all character of the plan. Similarly, when the plan provides for the employer to pay the employee’s premiums to the plan and to account for them in the manner of wages or salary at the time it makes those payments, the result is as though the premiums had been withheld from the employee’s wages or salary and the plan is considered an employee-pay-all plan.

If the employer makes some contributions for some employees, but not all, the plan is not considered an employee-pay-all plan, even for the employees who must make all contributions themselves. If plan members contribute only a portion of the premiums, the taxable portion of the benefit (if and when received) is equal to the total benefit received from the plan less the sum of the contributions made by plan members since December 31, 1967, and for which deductions have not previously been taken.

Question 45

Explain the clarification provided by IT-428, Wage Loss Replacement Plans with respect to EI premium reduction.

Answer 45

A wage loss replacement plan may qualify the employer for a reduction in EI premiums. The employer must use 5/12 of this reduction for the benefit of employees. The employer may pass on the benefit directly, indirectly through an employees’ health and welfare trust, or in any other manner, but it is only tax-free in an employee’s hands if given in the form of a benefit specifically exempt from taxation.