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Incorporated physicians: A heads-up about health and welfare trusts


If you’re an incorporated physician, you may have set up a health and welfare trust to provide medical benefits to your employees. (This may also be known as a private health services plan.)

Did you know that health and welfare trusts will soon be discontinued? On May 27, 2019, the Minister of Finance announced proposed new rules to this effect. The rules describe how a health and welfare trust should be converted to an employee life and health trust, a plan that offers similar advantages.

On the surface, it sounds like a simple name change. But the fact is you may not be eligible for an employee life and health trust, resulting in tax implications for you.

Let’s go over the basics.

What is a health and welfare trust?

A health and welfare trust is set up by an employer to provide a range of benefits to their employees. Incorporated physicians have used them to provide medical benefits to themselves and their family members. The trust can be self-insured and self-administered or it can be managed through a third party.

What are the advantages of a health and welfare trust?

There are advantages for both the employer (your corporation) and the employees (you and your family members).

The corporation makes contributions to the health and welfare trust that are tax-deductible. What’s more, the contributions are paid out of pre-tax professional income. For employees, there is no tax on the benefits, i.e., the medical expenses paid by the trust on their behalf.

Are there any restrictions on health and welfare trusts?

Beneficiaries of the plan who are both employees and shareholders must be receiving benefits from the plan because of their employment status. Failing this, the tax benefits are impacted.

What is the new proposed legislation about?

Health and welfare trusts aren’t governed by tax legislation, but employee life and health trusts are. In 2018, the government set out to regularize this dual situation: the Department of Finance announced that after 2020, it would no longer apply its long-held administrative positions to health and welfare trusts. The proposed legislation describes how health and welfare trusts can be converted to employee life and health trusts, and it includes transitional rules to help facilitate eligible conversions.

What is an employee life and health trust?

Similar to the health and welfare trust, an employee life and health trust is set up by employers to provide health and welfare benefits for employees. Employee life and health trusts were introduced in 2010, along with applicable tax legislation.

One difference between the two plans is that an employee life and health trust must have a class of beneficiaries (i.e., employees) who are not shareholders or related to shareholders of the company. This means that professional corporations where the only employee is the physician shareholder will likely not qualify to have an employee life and health trust.

What’s the implication?

If you’re an incorporated physician who has a health and welfare trust for yourself and your family members, it’s likely that the trust will not be eligible for conversion to an employee life and health trust, unless changes to the proposed legislation are introduced.

What happens if a conversion is not possible?

If you have a trust that cannot be converted to an employee life and health trust and that you don’t wind up by the end of 2020, the trust will be considered a regular employee benefit plan. 

That means you, as an employee, could pay tax on any payments the plan makes on your behalf or on behalf of your family members. There are exemptions in some cases, but these do not include self-insured and self-administered medical plans for employees.

If you have a health and welfare trust, what should you do?

You should contact your tax advisor to discuss the impact of these proposals on your situation and consider what changes you might need to make.  

About the Author

Angela Campbell, CPA, CA, is Assistant Vice President with the Taxation Services Team at MD Financial Management. She and her team of tax professionals provide tax solutions, tax planning and tax compliance for the MD Group of Companies.

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