myHSA is an administrator of self-insured benefit programs for Canadian employers. We operate as a PHSP (Private Health Services Plan) and not a Health and Welfare trust, so it is unclear at this time whether the proposed changes in the 2018 budget will affect our business at all. On behalf of the employers that we represent we would like to provide our comments and suggestions in hopes to provide some clarity. In our view, the major difference between the two structures is a possibility for people to artificially lower personal taxes by funding a perpetual tax-preferred health trust, regardless of whether the company is operating or not, as opposed to true employee benefit plans (PHSPs) where the funds cannot roll over past twelve months after the expiration date of the plan and not for the infinite life of the trust.
We have reviewed the proposed changes to the Health and Welfare trust, rolling this into an ELHT trust agreement. Although we believe we understand the thoughts behind doing this (to clarify the position and to amalgamate two very similar documents into one), we feel that there are some important discrepancies between the two arrangements which could impact small businesses that currently provide benefits to their employees using this program.
A PHSP/ HWT is a way to offer Canadian business owners different options when providing benefits to themselves as well as their employees. In a lot of areas, a small to mid-sized business owner cannot buy an employee benefit plan from an insurance company that provides a method for employee retention or a cost-effective plan. The drawback of an insured benefits program, especially for small to mid-sized businesses, is that the cost of an insurance plan based on coverage can be unaffordable or unattractive.
The part of an ELHT that does concern us, and requires clarification, is that the largest difference between an HWT and ELHT is the anti-avoidance concept; ELHTs have an anti-avoidance concept of a “key employee” which is a high-income employee or those that hold significant shareholdings. Benefits cannot accrue more favourably to such employees than to other employees. In addition, at least one class of beneficiaries of an ELHT must contain more than 25% of all employees and at least 75% of that class must not be a key employee. This rule may prove to be problematic for some employers. Many sole corporation owners, and some employees, use self-funded plans as their only form of benefit. The introduction of this document essentially says that small companies who cannot find a benefit plan through an insurance company, and are self-funded, cannot have a plan at all.
There are, however, other ways for the business owner to apply for a tax credit, such as the METC. The fundamental difference between PHSPs and METCs is that a PHSP is used to provide a business with a tax effective benefit plan for the employees of the organization, whereas a METC is an allowance for all individuals, and not just business owners attempting to provide a compelling benefit plan to their employees. This will affect the growth of small businesses in Canada because employers will struggle growing their organization with expensive, sub-par insured benefit programs (which is what they will have to provide). From my understanding of the original intent of these self-insured structures, meant to help small businesses with employee benefit offerings, this is exactly the opposite of the intent.
Our understanding is that it is not the intention of the Government to tax employee benefits (as determined in the last budget) and therefore the introduction of these new guidelines would essentially eliminate any form of an effective non-taxable benefit plan for small businesses, which we feel strongly needs to be addressed and clarified. If a small business is not able to provide a cost-effective benefit plan to its employees, then in our view the liberals would be indeed taxing employee benefits. The difference between a shareholder and employee can be easily identified using 4 key points. We use the following fundamentals to guide any employer that is looking for a self-funded plan to see whether they qualify for it. We suggest this wording, that is currently found in the HWT, should be applied to the guidelines which would provide clarity to business owners as to what the intent of these plans are (an employee benefit).
1. The benefit is available to all employees, including those who are neither a shareholder nor related to a shareholder (regardless of whether they have chosen to participate in the plan); or
2. The benefit is not available to all employees, but there is a logical reason to exclude some employees; or
3. It is reasonable to conclude that the benefit has been provided as part of a reasonable remuneration package for the individual as an employee; or
4. The benefit is comparable to that offered to non-shareholder employees of businesses of a similar size who perform similar responsibilities.