Health and Welfare Trusts
Private health insurance plans have been available to Canadians for decades. These plans serve to provide financial reimbursement for medical costs, dental fees, drugs, and other health-related costs. The employers who provide such benefits (on a basis that is almost always tax-free to the employee) pay for and deduct the cost of these plans.
The owners of private corporations are free to acquire this type of coverage for their employees (it is important that this benefit is made available to all employees - note that, of course, the only employees might be the owners themselves, and possibly their spouses or other related persons).
A big problem with these plans has been their cost - generally, they are quite expensive. And, the coverage for reimbursable expenses has traditionally been bundled up with other products more traditionally associated with life insurance companies, such as life insurance itself, accidental death and dismemberment insurance, and long term disability insurance. Obviously, this type of coverage must be obtained from an insurance company.
However, the cost for “reimbursable expenses” can comprise 70% of the total cost of the bundled group coverage. And when you examine the situation, you find that reimbursement plans aren’t really insurance at all. It has been found in various studies that the “claims ratio” (the portion of the premium dollars that are, on average, paid out to group plan members) is only around 65%. Thus, from every dollar of premium paid, the insurance company keeps 35 cents, permanently. If the business has a year with abnormally high claims, it is usually faced with a substantial increase in premiums in the next year, in order for the insurance company to regain it’s targeted claims ratio. Thus, such plans really only serve to average-out the costs incurred, plus provide a profit margin to the insurance company.
This starts to get expensive, and as a consequence, many businesses have elected to 'unbundle' their group benefit coverage, purchasing only the true insurance items from insurance companies, and pursuing a “do it yourself” plan for the rest.
At this stage, the matter simply becomes a bookkeeping exercise, which can be administered by the business itself. This, then, turns to the issue of whether third parties need be involved. We are aware, for instance, of several instances where businesses manage their own health-cost reimbursement plan, basically like a petty cash fund, with a separate bank account, run by a responsible (and, hopefully, arm’s-length) employee. Members submit various dental or medical bills, as defined and limited by the rules established by the business owner, and these costs are reimbursed from this separate bank account. So long as all employees have at least some access to this plan, and there is some reasonably organized approach made to administering and record keeping within the plan, these businesses are satisfied that their program meets the tests of a qualified private plan.
There are those, however, who feel that the existence of a third party provides an additional ‘gloss’ of legitimacy, and so we have seen the emergence of various providers, some operating only on the Internet, who basically offer a service of turning around various health-related costs for a fee (usually, 10% of the reimbursed amount). On the presumption that employer funds are available, the third party simply processes payment, without any adjudication or assessment of eligibility whatsoever. In fact, the persons employed to do this by third-party “providers” are simply clerks, with no insurance or other credentials whatsoever. More than a few of our clients have wondered what, then, is the value obtained for the 10% markup. Thus has evolved the “do-it-yourself” plans described above.
CRA has made comments at various venues that a third party “adjudicator” is necessary for compliance under their rules for treating such plans as qualified, and indeed, the convenience of the “plus 10%” providers is attractive to many. However, it should be possible for a responsible employee within the organization to be just as good at administering such a plan, and of course, to do so as part of their normal duties, without a markup.
Health and welfare trusts are an excellent method of managing the health costs for you and your employees, on a fully-deductible basis. This is a complex area - again, we remind readers of the need to seek specific advice for your particular situation.