web analytics

Lump sum health plan payouts to be taxed

Posted by on Oct 18, 2011 in Health, Moneyville | 0 comments

By Sheryl Smolkin

Read this article and comments at Moneyville.ca 

If your employer or former employer cancels your medical plan and pays you a lump sum settlement next year, you may be in for a shock. Beginning in 2012 the Canada Revenue Agency will tax lump sum amounts received by employees or retirees in lieu of health and dental coverage.

Many retiree “buyouts” have taken place in the context of a court supervised process and/or a class action lawsuit brought against a former employer alleging that termination of health and dental coverage was a breach of contract.

Previously CRA viewed lump sum payments received by employees or retirees in these circumstances as “advance reimbursement” of medical expenses and therefore not taxable when received.

However, CRA’s revised interpretation is that starting Jan. 1, employers making these lump sum payments will have to withhold applicable taxes and report payments on a T4 Information Return. When the employee or retiree does subsequently incur a medical expense, a medical expense tax credit can be claimed.

But future availability of the medical tax credit will be cold comfort to an individual who no longer has medical or dental insurance, because the lump sum will be taxed based on his income for the year in which it is received.

In contrast, the medical expense tax credit that can be claimed in subsequent years is available only on qualifying medical expenses equal to the lesser of $2,024 (2011) or three per cent of net income, and based on the lowest combined federal/provincial personal tax rate (20.5 per cent in 2011 for Ontario taxpayers).

As a result, someone who formerly received tax free reimbursement from his employer-sponsored plan for all or part of his medical/dental expenses will have to pay tax on a lump sum settlement up front, with the prospect of only nominal tax relief down the road as medical expenses are actually incurred.

In cases of employer insolvency there may be a significant delay between the insolvency and the eventual payment of amounts to retirees or former employees. Therefore, where the employer’s insolvency occurred before 2012, the payment eventually made to the retirees in connection with the termination of their benefit plans will not be taxed, even if it is received after the beginning of next year.

 

 

Leave a Comment

Your email address will not be published. Required fields are marked *

*
To prove you're a person (not a spam script), type the security word shown in the picture. Click on the picture to hear an audio file of the word.
Anti-spam image