Understanding the differences in workplace insurance policies

By Tony Poland, LegalMatters Staff • Employees need to be aware of the differences and implications of being covered under a health and welfare trust (HWT) as opposed to a traditional workplace insurance policy, says trauma-informed long-term disability and insurance lawyer Leanne Goldstein.

“Although some may not have heard of them, HWTs have been around for quite a while,” says Goldstein, the founder of Leanne Goldstein Law. “For corporations, there are certain tax advantages so they may decide to opt for a trust over a more typical disability benefits coverage provider like an insurance company.

“But there are subtle differences and when employers move from an insurance provider to a HWT, employees may not realize how those differences impact them until they make a claim for disability benefits,” Goldstein tells LegalMattersCanada.ca.

Many employees receive group disability coverage through a policy issued to their employer by an insurance provider, she says. When an employee submits a long-term disability claim, it is administered and adjudicated by the insurer and benefits are typically paid by the insurer, Goldstein adds.

Health and Welfare Trusts were introduced in 1986

Health and welfare trusts were introduced in 1986 by the Canada Revenue Agency and were followed by the newer entity, the Employee Life and Health Trust (ELHT), in 2010, she says. Both have been used by corporations to manage healthcare costs for their employees while keeping the funds under their control, says Goldstein.

With a HWT, money is paid into a trust to provide employees with traditional health care benefits such as long-term disability (LTD), dental, prescription drugs and vision care, she says, adding that any surplus of funds cannot be used for reasons other than what it was intended.

“That is the way it is usually sold to employers. They are told, ‘This money is for your use only and cannot be redirected to any other sources,’” Goldstein says. “The employee is told they are the ultimate beneficiary but I do not see it in the same light.

“When disability benefits are paid out from a health and welfare trust, those benefits are always taxable in the hands of the employee,” she adds. “Under the insurance regime, you could have a scenario where you might have insurance premiums paid a certain way and that results in benefits under the policy being non-taxable. So that when individuals collect their LTD benefits, they are tax-free.”

Goldstein says LTD payments are a percentage of income and they can vary from about 50 per cent to 75 per cent of the employee’s salary, although the average payment is about 66 2/3 per cent.

‘Already people are not receiving their full income’

“So, already people are not receiving their full income,” she says. “When you add taxes to that, a claimant would have even less money in their hands. The tax implications can be huge.”

The other thing to consider is how claimants are treated by adjudicators in the trust versus insurance regime, Goldstein says.

“Typically, when I am litigating against a trust, there seems to be this belief that their duty is perhaps lower than the duty of an insurance company’s duty of good faith,” she says.

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Insurers are regulated by the Insurance Act and are bound by a duty of good faith.

“I can also rely on a fairly significant body of case law that exists about an insurer’s adjudication obligations when I am litigating against an insurance provider,” adds Goldstein. “Even though it varies from insurer to insurer, there is still a generalized approach to how claims are adjudicated in the insurance provider realm. The process has also been refined by how case law has evolved.”

However, she says trusts are not regulated under the Insurance Act.

‘Trusts owe a fiduciary duty’

“And there really isn’t much case law dealing with how health and welfare benefit trusts are supposed to adjudicate benefits,” Goldstein says. “In my view, trusts owe a fiduciary duty and that could be seen potentially as a higher duty incorporating within it the concept of good faith. A fiduciary duty requires someone to actually put the other party’s interests ahead of their own as opposed to on a par.

“But that doesn’t seem to be happening in the context of Health and Welfare Trusts and Employee Life and Health Trusts, at least as far as I have seen,” she adds. “Even though these trusts are not new, case law regarding conduct in the course of adjudication has not evolved as much as it has in insurance litigation and that can present challenges.”

Goldstein says in her experience, trusts can be more difficult to deal with at times than insurance companies.

Much like a typical insurance claim, she says people seeking benefits from a trust should keep careful track of what happens when their file is being adjudicated and if their claim is denied, they should consider seeking legal advice.

It is important to gather information

Goldstein also says it is also in an employee’s best interest to gather as much information as they can if their employer is considering a move to a HWT from an insurance provider.

“Employees will be told that a change is being made but they don’t always get enough details to understand the nature of the change,” she says. “The employer might say, ‘We are going forward and this is who is going to be managing it,’ but they may not expand on the positives and negatives of having each entity.

“It is a question of being knowledgeable as to what the differences might be. In some cases, employees may have the option of providing input about a potential change, whether it is through a workplace union or through consultation with the employer,” Goldstein adds. “For those employees who have a voice, it is important to be aware of the fact that there are consequences to switching to a trust, in particular tax consequences. It is incumbent upon employees to ask questions and share any concerns that they might have.”