New CRA guidance on Wage Loss Replacement Plans

Many of you may have noticed the late release of the T4001 Employers’ Guide for 2014. One reason for this might be the expanded guidance the CRA posted on its web site, in the CPP/EI rulings area, on December 17, 2013, related to the CPP/EI treatment of wage loss replacement plans.

This expanded guidance stems in part from legislative changes over the last several years (see these 2012 and 2013 articles), as well as from a series of federal Court of Appeal cases, notably the TTC case, as well as two older cases (National Bank and Laval University).

It’s not so much that the law related to WLRPs has changed. Apart from benefits received on a lump-sum basis, the only substantive change was to return the law, for CPP purposes, to what it had been before the CRA’s loss in the TTC case.

Before looking at this new CRA guidance, let’s review the general principles that apply to the CPP/EI treatment of WLRPs.

There are two basic conditions that have to be met before WLRP are subject to CPP and EI:

  • The benefits themselves have to be income taxable; and
  • There has to have been an employment relationship between the provider and recipient of the WLRP benefits.

With the exception of changes related to lump-sum benefits, the best description of what makes WLRP benefits income taxable remains the CRA’s IT-428. However, this focuses on the income tax treatment and doesn’t discuss how CPP/EI may or may not apply.

A plan is not a WLRP, for income tax purposes, unless benefits are provided on an insurance basis. Employers can either self-insure WLRP benefits or insure them with a 3rd party under a contract of insurance.

If a WLRP is insured, it’s the insurance carrier that provides benefits to employees. Since there is no employment relationship between the carrier and employees paid these benefits, these are not subject to CPP or EI.

If WLRP benefits are self-insured, we have to look at how benefits and claims are administered. Employers can either self-administer these or some or all of this administration can be outsourced, termed ‘Administrative Services Only’ or ASO.

If WLRP benefits are self-insured and self-administered by the employer, these are subject to both CPP and EI, since it’s the employer who directly provides the benefits concerned.

If administration of self-insured benefits is outsourced to a 3rd party provider, in a physical sense employees typically receive payment for their WLRP claims from the 3rd party. Despite this, the law regards the employer as the person who has provided them, with the ASO acting only as the employer’s agent. As such, WLRP benefits self-insured by the employer and provided on an ASO basis are subject to both CPP and EI.

Let’s examine how the CRA applies these principles in its new guidance on the CPP/EI status of WLRP. Below are the indicators the CRA applies when determining if WLRP benefits are provided by an employer, perhaps indirectly through an ASO agent acting on the employer’s behalf, or whether WLRP benefits are provided by a 3rd party, acting on its own behalf under a contract of insurance:

  • Who determines the type of benefits offered under the plan?
  • Who determines whether a specific employee’s application for coverage is accepted?
  • Who determines how much an employee will be paid for a specific claim?
  • Who determines how frequently benefit payments are made?
  • Who has legal liability for benefit claims made by employees?
  • Who is liable for benefit payments to employees (which may be different than the person who physically makes these)?
  • Who determines how much the employer has to contribute into the WLRP fund?
  • Who bears the financial risks associated with offering WLRP benefits to employees?

While there is no hard and fast rule how these factors are applied to any given WLRP, it seems the most important of these are the financial ones, the ones related to liability for claims and payments. Under an ASO arrangement, although the 3rd party service provider may be the one making physical payment of claims, the employer typically remains liable for funding the plan and for topping up the plan when claim payments exceed that funding. As such, under most ASO arrangements, the employer is regarded as the person providing benefits; making benefit payments subject to CPP and EI withholding.

Since there are so many different variations possible among WLRP administrative arrangements, it’s important that WLRP details be examined carefully before coming to any conclusion regarding CPP and EI source deductions.

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posted to Canadian HR Reporter on February 11, 2014.

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
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