Canada Pension Plan and Employment Insurance Explained

Wage loss replacement plans

Introduction

This document provides more detailed information about wage loss replacement plan (WLRP) benefit payments and other related information to that contained in T4001, Employers' Guide - Payroll Deductions and Remittances and other Canada Revenue Agency guides and publications. This information is general in nature and since the meaning of the term “wage loss replacement plan” can vary greatly, the treatment of WLRP benefit payments is based on the specific terms and conditions of each plan. Various stakeholders were consulted with respect to the content of this article.

The document addresses whether WLRP payments are pensionable under the Canada Pension Plan (CPP) and insurable under the Employment Insurance Act (EIA). Payments that are pensionable and insurable are subject to CPP contributions and employment insurance (EI) premiums.

If after reading these guidelines, you require further clarity on your plan, see How to request a ruling.

Background

In 2010, the Federal Court of Appeal (FCA) issued a decision in Toronto Transit Commission v. Canada (M.N.R.) 2010 FCA 33 regarding payments from a WLRP indicating that the payments in question were not pensionable for CPP purposes. The FCA also indicated that the matter would be for Parliament to resolve. This decision did not change insurability of these payments.

The Keeping Canada’s Economy and Jobs Growing Act (2011, c.24) received royal assent on December 15, 2011 and included amendments to the CPP. The changes to the CPP were retroactive to January 1, 2006. This ensures that employees in receipt of these payments will have pensionable earnings. It also ensures that individuals’ eligibility for CPP retirement and disability benefits and the amounts of those benefits could not be negatively affected by CPP contribution refunds that could have been requested by employers.

Employer responsibilities

All employers are required by law to deduct CPP contributions and EI premiums from most amounts they pay to their employees. Employers must remit these amounts to the CRA along with the employer’s share of CPP contributions and EI premiums.

When benefit payments are made by a third party (such as a trustee, a board of trustees, or an insurance company) who is not the actual employer, the third party can be deemed to be the employer. The actual employer is the party that is liable to pay its employees.

The CRA can hold both the actual employer and the deemed employer responsible for undeducted CPP contributions and EI premiums. Employers and third-party payers should communicate and agree on which party will withhold, remit, and report these amounts.

More information on employer responsibilities and obligations can be found through our Payroll menu page.

What is a WLRP?

Generally, a WLRP is an arrangement between an employer and employees, or an employer and a group or association of employees, where the employees receive benefits on a periodic basis for loss of employment income due to sickness, maternity, or accident.

Each WLRP is unique and can be structured and funded in many different ways. The employer can make payments directly to employees or a third party, such as an insurance company, trustee, or other independent organization can make payments to employees, either as an agent of the employer or in its own right under a contract with the employer. Whether the payments are subject to CPP contributions and EI premiums will depend on the legal relations between the employer and any third party.

Publicly administered programs, such as provincial workers' compensation plans and disability benefits under the Canada Pension Plan or Quebec Pension Plan, are not WLRPs.

When you determine whether WLRP benefit payments are pensionable and insurable, it is important to analyze the terms and conditions outlined in the plan documents. It is also important to consider the contractual obligations of the parties involved. Examples of documents to consider are a copy of the plan, collective agreements, and employment contracts.

In order to be considered a WLRP all of the following conditions must be met:

  • The employer funds any part of the plan.
  • The plan must be a group plan.
  • The purpose of the plan is to compensate employees for the loss of employment income due to sickness, maternity, or accident.
  • The benefit payment must be made on a periodic basis and not in a lump sum.
  • The plan involves a formal contract of insurance or follows insurance principles. Following insurance principles means the funds are accumulated, normally in the hands of a trustee or in a trust account, and are calculated to be sufficient to meet anticipated claims.

Plans that are funded on an ongoing basis are generally considered not to be based on insurance principles. An example of this would be where the employer pays the claims as they arise. Another example would be an arrangement where the employer is billed for payments as they arise (including an administrative charge) by a third party who is administering the plan on its behalf. These plans are sometimes referred to as “pay as you go” plans. The funds are not accumulated to be sufficient to meet anticipated claims. Therefore, the condition described in the last bullet listed above is not met and the plan is not considered to be a WLRP. Generally, payments from these types of plans are subject to CPP contributions and EI premiums because they are considered to be employment income.

If the plan in question does not meet all of the five conditions listed above, the remainder of this article will not apply.

If, however, the plan in question does meet all of the five conditions listed above, continue reading to determine whether the payments are pensionable and insurable.

When are WLRP benefit payments subject to CPP contributions and EI premiums?

WLRP benefit payments paid to an employee are considered to be employment income because they are paid in respect of an employment.

The answer as to whether they are subject to CPP contributions and EI premiums will vary depending on whether the WLRP benefit payments are:

(1) paid directly by the employer where the employer funds any part of the plan; or

(2) paid by a third party, whether it does so on its own behalf or on behalf of the employer where the employer funds any part of the plan.

If the payments are made by the employer or by a third party on behalf of the employer, they are subject to CPP contributions and EI premiums.

If the payments are made by a third party on its own behalf (in the interest of its own business), they are not subject to CPP contributions and EI premiums.

(a) What does the “employer funds any part of the plan” mean?

In general, an employer is considered to fund any part of the plan when the employer:

  • fully funds the plan by paying all the costs; or
  • jointly funds the plan with the employees by sharing in the cost; or
  • makes one sole payment into the plan.

If employees reimburse the employer for the cost of the WLRP, the premium costs are considered to be paid by the employees and not the employer.

When employees are obligated to pay all the costs of a plan, the plan is considered to be an employee-pay-all plan. Since employees exclusively fund these plans, any benefit payments are not subject to CPP contributions and EI premiums. You can find more information in paragraph 16 of IT428 – Wage loss replacement plans.

(1) The employer pays benefits directly to an employee from a WLRP

If the employer pays benefits directly to an employee from a WLRP, the benefits are subject to CPP contributions and EI premiums if the employer funds any part of the plan.

(2) A third party pays WLRP benefits to an employee

WLRP benefits are subject to CPP contributions and EI premiums if the third party pays benefits to an employee on behalf of the employer, if the employer:

(a) funds any part of the plan; and

(b) exercises a degree of control over the plan; and

(c) directly or indirectly determines the eligibility for benefits.

(b) What does the “employer exercises a degree of control over the plan” mean?

The following is a non-exhaustive list of indicators that the employer exercises a degree of control over the plan:

  • The employer determines who is and isn’t covered by the plan and has the sole right to refuse coverage to an employee. For example, an employee may be refused coverage due to an existing medical condition. This is different from administering benefits at the time of claim, which is discussed under the heading (c) What does the “employer determines the eligibility for benefits” mean?
  • The employer determines the types of benefits offered.
  • The employer determines the amount and frequency of the payments.
  • The employer is liable to make the payments even if they are drawn from the third party’s bank account. When a third party issues payments in its role as administrator of the employer’s plan, the employer is considered to have paid the benefits to the employee.
  • The employer, and not the third party, would hold ultimate legal liability in the event of lawsuits concerning the plan.
  • The employer determines the value of deposits to be placed in the plan or trust fund.
  • The employer maintains all or most of the financial risks and obligations associated with funding the plan and/or paying claims under the plan.

The following is a non-exhaustive list of indicators that the employer does not exercise a degree of control over the plan:

  • A third party has the sole right to refuse coverage to an employee. For example, an employee may be refused coverage due to an existing medical condition. This is different from administering benefits at the time of claim, which is discussed under the heading (c) What does the “employer determines the eligibility for benefits” mean?
  • A third party maintains all or most of the financial risks and obligations associated with funding the plan and/or paying claims under the plan.
  • A third party would hold ultimate legal liability in the event of lawsuits concerning the plan.

(c) What does the “employer directly or indirectly determines the eligibility for benefits” mean?

This refers to determining eligibility for benefits at the time of claim, and not eligibility for coverage under the plan. There are two ways for an employer to determine eligibility for benefits:

  • directly; or
  • indirectly through a third party acting as its agent.

The employer directly determines the eligibility for benefits when the plan documents specify that the employer maintains sole rights in determining who will receive benefits. For example, the employee must submit the required medical documentation to the employer’s satisfaction; and the employer reserves the right to authorize or refuse payment. This can be the case even when a third party administers the plan.

The employer indirectly determines the eligibility for benefits when the plan documents state that a third party is acting as the employer’s agent. In this situation, the third party’s decisions are in fact and in law the employer’s decisions. The third party adjudicates claims on behalf of the employer, and the employer is bound by the third party’s decisions. The employer maintains ultimate control over an employee’s eligibility for benefits.

When are WLRP benefit payments not subject to CPP contributions and EI premiums?

WLRP benefit payments are not subject to CPP contributions and EI premiums when an employee receives benefits from third party if the employer:

  • does not exercise a degree of control over the plan; or
  • does not directly or indirectly determine the eligibility for benefits.

Supplementary amounts (top-up amounts)

Employees may receive supplementary or top-up amounts when WLRP benefits are below 100% of the employee’s regular salary or wages.

Generally, supplementary or top-up amounts are subject to CPP contributions but are not subject to EI premiums when:

  • the employer makes the payments directly to the employee while the employee is receiving WLRP benefits from a third party (usually an insurance company).

Supplementary or top-up amounts are not subject to CPP contributions and EI premiums when:

  • the payments are from an individual insurance plan that the employee purchased from an insurance company, at the employee’s own expense, to top up employer-paid WLRP benefits that fall short of normal income levels.

For more information, see CPP-EI Explained - Pensionable and Insurable Earnings Explained under the heading “Amounts that are not included in insurable earnings.”

How to request a ruling

If, after reading these guidelines, you are still not sure if payments are subject to CPP contributions and EI premiums the worker, the payer or the third party can request a ruling. For more information on the ruling process, see How to obtain a ruling for Canada Pension Plan and Employment Insurance purposes.

For more information

For more information, call 1-800-959-5525.

Legislative references

Related topics

The amount of CPP contributions an employer must deduct is based on contributory salary and wages. Contributory salary and wages do not include certain types of earnings. For example, a worker’s earnings may be excluded from the worker’s contributory period by reason of disability. That is, if the worker is considered disabled under the Canada Pension Plan or the Quebec Pension Plan, the worker’s earnings are not subject to CPP contributions.

For more information including a list of the types of earnings that are or are not included in contributory salary and wages and insurable earnings see CPP-EI Explained - Pensionable and Insurable Earnings Explained.

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