In December 2011, the Canadian government clarified legislation in Bill C-13 passed back in 2006 regarding CPP contributions on ASO disability plans. Payments from ASO plans are now subject to both CPP employer and employee contributions. Currently, the contribution level is set at 4.95% of earnings payable by the employer and employee up to an annual earnings ceiling of CDN$ 50,100 (2012). There is no impact on insured disability plans.
The Canada Revenue Agency (CRA) will apply the CPP legislative changes effective Jan. 1, 2012. The 4 key points for ASO disability plan sponsors are as follows:
1. Employers (not the payers of ASO benefits such as insurers or TPAs) are obligated to deduct, remit and report CPP contributions on taxable disability payments made under an ASO plan from Jan. 1, 2012 onward.
2. The CRA also confirmed that when an employee has been approved for CPP disability benefits, the disability benefits paid under and ASO plan are exempt from CPP contributions.
3. Employers have to report these remittances in a specific form called a T4 slip.
4. It is suggested to obtain professional advice from a Canadian legal, tax or benefit advisor on how these changes impact an employer’s specific ASO plan.
This ruling brought back to light the fact that ASO disability plans are also subject to Employment Insurance (EI) premiums. Many ASO plan sponsors were not remitting EI premiums on disability payments.
The main intent of this legislative change to require CPP contributions on ASO disability benefits is to preserve an employee’s right to CPP benefits in retirement. EI premiums maintain eligibility for unemployment benefits.
Since ASO disability benefits are now subject to CPP contributions, many employers are re-evaluating their plans. There are in essence 3 options for an employer:
1. Convert the ASO plan into an insured plan (no CPP contributions required).
2. Change to an advice-only model (similar to ASO but here the employer, not the insurer or TPA, pays the claimant directly). CPP contributions apply but the remittance process is simplified.
3. Continue with the ASO model and incur CPP and EI contributions.
As Bill C-13 pertains to federal legislation, the separate provincial Quebec Pension Plan (QPP) is not directly affected. However, since the intent of the QPP has always been to mirror the CPP, it is expected that the relevant legislation for Quebec will be clarified in the near future. Employers should assume that Quebec based ASO disability plans will also be subject to QPP and EI contributions.
In case you have any questions or require additional information, please contact your regional GEB representative.