Is your benefit plan offside? Many are and employers are unaware

In my role as a benefits specialist I speak to employers every day about their benefit plans. These conversations may be while servicing existing clients, setting up plans for new ones, or just providing advice for those that are seeking clarification.

In my role as the founder and administrator of Canadian Group Insurance Brokers (Canadas largest benefits association focussed on education), I also speak to advisors from across the country that are looking for assistance in protecting their clients.

Lastly, I also act as an Expert Witness in lawsuits that are related to benefits (mainly in Ontario). Between these three complimentary roles, I gain experience at a rate many times normal and benefit from the learnings of hundreds of advisors experience rather than just my own. This also means that I get to observe situations that I would never see otherwise. I am very lucky indeed, to be in this position.

The problem I see on an almost daily business is employers that have benefit plans that are incorrectly set up and administered. This creates huge liabilities, not just to the employer, but to the advisor as well. Some of these problems are a failure to follow the income tax act, others are contractual in nature, still others are administrative.

Here is my list of where employers go wrong, and are unaware:

1. Failing to structure plans to be contractually mandatory in nature.

This put the risk of late enrolments, & employees opting-out and changing their minds, fully at the employers feet. Why take on those multi-million dollar risks? A mandatory plan has wording such as this...

"Participation Requirements: 100% of eligible Employees, subject to a minimum of 10 Insured Employees..."

2. Failing to meet the minimum participation requirements.

So you never made it mandatory as in #1 above, and now you've failed to keep the minimum number of staff enrolled. Again all the risk is the employers and the insurer can walk away from the contract at anytime. Why take this risk on? A non-mandatory plan has wording such as this...

"Participation Requirements: 75% of eligible Employees, subject to a minimum of 10 Insured Employees..."

3. Ineligible people on the plan without proper contractual amendments.

Shareholders (that are not employees), part-time, seasonal, partners behind holding companies, contract staff, independent contractors, and foreign workers are just some that are ineligible to be enrolled on a benefit plan. Adding them means the insurer can deny a claim and the employer could be held 100% responsible. The list above does NOT qualify in the contract wording or with CRA (see samples below). Don't take my word for it, read your contract. You'll see, under eligibility, that only permanent full-time employees are eligible. .

"Employee" means a Resident who is directly and permanently employed on a full time basis by the Policyowner at the Policyowner's place of business in Canada, or at such other place or places in Canada as such person may be required to be to carry on the Policyowner's business and is regularly scheduled to work a minimum of 20 hours per week..."

IT-339R2 states that coverage must be restricted to “the employee, the employee’s spouse (or common-law partner) and any member of the employee’s household with whom the employee is connected by blood relationship, marriage (common-law partnership) or adoption.” The CRA has stated in technical interpretation #2008-0303211E5 dated February 25, 2009 that “a plan would not be a PHSP where benefits may be paid to a person who is not one of the above persons.” 

4. Employers that enrol shareholders (that are not employees) onto the plan, use Cost-Plus for them alone, or establish enhanced benefits for shareholders over "regular" employees, put the plan at risk and benefits being taxable.

You need to look no further than the Spicy Sports case for clarity here.

5. Your advisor never informed the employer (you) how to protect yourself.

Employers can obtain a form of liability coverage to protect themselves from errors and omissions incurred while administering the plan. Are you protected? Did your advisor explain this often free coverage to you?

6. Employers choosing to use generalists when specialists are available.

If you work with a benefits specialist, then odds are you know all of the info above. If not, call on a CGIB member advisor, they'll be able to point you in the right direction. If your advisor is not a member of CGIB, ask them... why not?

www.cgib.ca