In early 2007, Ian Wright, a lawyer and partner at Scott, Petrie, Brander, Walters & Wright LLP, in London, Ontario approached our firm with an insightful query. Ian, an employment lawyer, believed that the way employee benefits had been valued by legal counsel across Canada over the decades was inadequate. He intuitively knew that the methodology to calculate the true cost to employees of losing employee benefits when they were let go or left their place of employment, had not fully represented the true monetary value of the loss.
The issue that Ian had with the traditional method of valuing lost employee benefits centered on the fact that it did not represent what it would cost the former employee, as an individual, to purchase comparable benefits privately and at the same time place him or her in the same financial position as before his or her employment ended.
Issues that the traditional approach neglected to address include:
Employers are able to deduct their employee benefit contributions as a business expense while their employees receive these same benefits either tax-free or tax-deferred. If the same or similar benefits were purchased by a former employee privately, this individual would have to pay with his or her after tax dollars, leaving fewer dollars in the pocket of the affected former employee.
Employers are able to buy employee benefits at a reduced cost from insurance companies or other benefit providers because the cost of administration and risk of loss/cost of paid out benefit for these providers is spread out over a number of employees who form the group. A former employee would not enjoy such an economy of scale or dilution of risk. Instead, a former employee would be insured only on an individual basis. For such individual coverage, there is no dilution of the risk of loss to an insurance company or other benefit provider and any such provided would have proportionately higher costs of administration. As a result, a former employee would pay a substantially greater amount per benefit than those same benefits cost the employer and there is a question as to whether some of those benefits would even be available to an individual.
Lastly and of critical importance, the vast majority of employee group benefit plans do not discriminate whether someone is healthy or not and/or whether someone is a smoker or not. However, this does not apply when an individual applies privately for individual medical and dental, critical illness, short and long-term disability, long-term care or life insurance coverage. For example, smokers will pay substantially more for individual insurance coverage than if they were a part of group coverage. And for former employees who have health issues, there is the very real prospect that they will not qualify individually and will be denied coverage altogether.
Ian affirmed that the financial matrix used to show the true monetary value of a lost employee benefit should be represented in the total compensation in an employee’s severance package and furthered his argument with the following sound legal precedents:
The Ontario Court of Appeal in Davidson v. Allelix Inc.,  O.J. No. 2230 confirmed the law in Ontario is that a wrongfully dismissed employee may claim, in addition to lost salary, the pecuniary financial value of lost benefits flowing from such dismissal.
Soon after the Davidson decision, the case of Alpert v. Les Carreaux Ramca Ltee  O.J. No. 769 concluded that the dismissed employee, Mr. Alpert, was entitled to compensation for the loss of coverage under the employee medical plan “ … calculated by reference to the cost to the defendant [employer] of maintaining the plan in favour of Mr. Alpert.” NOTE: this method of calculating the compensation for the loss of coverage was suggested by Alpert’s counsel.
The Alpert decision was followed in the Connolly v General Motors of Canada Ltd.  O.J. No. 2811, where the judge although dismissing the claim of the dismissed employee because the employer had cause to terminate Connolly, nevertheless went on to conclude that on the issue of compensation (had Connolly been wrongfully dismissed), “… the measure of the ‘pecuniary value’ was the amount the employer would have had to pay to maintain the benefits for the benefit of the employee during the notice period.”
However in the case of Habraken v. MacMillian Bathurst Inc.  O.J. No. 1951, the court was again faced with the issue of valuing the dismissed employee’s benefits for the reasonable notice period. The court noted that “No specific evidence was offered as to the value of these benefits to the employee or the cost to the employer.” NOTE: In Habraken both employer and employee requested the court “to calculate these damages according to a percentage of the plaintiff’s annual salary of $46,500.”
The true value of a lost employee benefit is not a rote calculation. It is vitally important to determine with some accuracy the higher cost to a former employee of replacing lost benefits with similar benefits. These replaced benefits are paid for with after-tax dollars based on the former employee’s marginal tax rate. It is also important to determine whether certain portions of the lost benefits may not be available to an individual privately for any reason. As a result, the actual financial compensation for the lost benefits, which mitigate a former employee’s loss, becomes much greater than has been traditionally provided.
It is well worth the time and the investment to hire an expert in group employee benefits, with credentials and experience, to complete a proper evaluation of the true cost of lost benefits to a former employee. Under the circumstances, the sizeable benefit is definitely worth the marginal cost.
Imagine one day you have a massive heart attack and can’t come to work for weeks. What would happen to the day to day operation of your business? Who would pay the wages, write the cheques to pay the bills, deal with client concerns and most importantly generate new business?
While you may be in perfect health now, a critical illness could be right around the corner for any of us. According to the Heart and Stroke Foundation, “About 50,000 strokes occur each year in Canada and over 15,000 Canadians die as a result. Three hundred thousand Canadians are living with its effects. Stroke costs the Canadian economy about $2.7 billion a year….cardiovascular diseases cost the Canadian economy over $18 billion a year.”
The fact of the matter is that there are over 70,000 heart attacks in Canada each year and heart disease and stroke are the underlying cause of death for one in three Canadians.
While the prevalence of these diseases in Canada is at an astoundingly high level, the good news is that the number of people who die from heart disease, stroke and cancer has decreased in recent years. For example, according to the Canadian Cancer Society, while women have a 1 in 9 chance of developing breast cancer, they only have a 1 in 27 chance of dying from it. In men’s case, while there is a 1 in 7 chance of developing prostate cancer, there is only a 1 in 26 chance of dying from it.
As a matter of fact, according to Manulife, you have a greater chance of getting a critical illness before you reach 75, than you do of dying. This means that from a risk management perspective, insuring yourself against the risk of coming down with a critical illness is just as important and could be even more important than insuring yourself against the risk of dying during your working years.
A critical illness insurance policy can provide a lump sum tax free payment to help you pull through the financial hardship that a critical illness can create for you, your family and your business.
In addition to needing funds to replace your lost income (which may or may not be covered by your disability insurance policy, as you may not be able to qualify for the 90 or 120 waiting period that most disability insurance policies impose before starting to pay the claim), you may need money to pay for the following:
• Drugs or a course of treatment not covered by your provincial health insurance plan • Treatment in the U.S. or abroad • Cost of lodging and travel to and from treatment centers outside your area of residence • Renovating your home to accommodate a wheelchair or chairlift • Hiring a nurse to take care of you at home
If you have a partner in your business, you should seriously consider funding your partnership or shareholder agreement with critical illness insurance policies so that the business can receive a lump sum benefit to compensate for the loss of a key person during the period of medical treatment.
Most critical illness policies allow you to add a rider at an extra cost that will enable you to cancel the policy after 15 years and get a full refund of your premiums if you have never made a critical illness claim. Many companies also let you add a rider at an extra cost that will ensure your beneficiary gets all the premiums you paid for the policy in the event that you die while the policy was in force and before making a claim on the policy.
The pricing of critical illness policies depends on your age and health. However, your family’s health history also plays an important part in the underwriting decision. Therefore, if you are in perfect health yourself but have two or more immediate family members who have been diagnosed with cancer, stroke or heart attack at early ages, you may end up having to pay a higher premium for your policy as the insurance company will consider you at higher risk of coming down with one of those illnesses due to your family history.
Therefore, the sooner you look into assessing your need for critical illness insurance, the higher the chances that you can get approved at more favourable rates and of course the sooner you can transfer the risk to the insurance company.
Far too often, going to an estate planning seminar is like watching paint dry because the information is too technical and tax driven. Earlier this year, I was part of an estate planning session that focused on more unconventional estate planning advice filled with lots of common sense. Here are some great tips I got from the speaker Doris Bonora, partner of Reynolds Mirth Richards & Farmer
1. Clarity and communication should be the goal of estate planning. Far to often we get caught up in the legal and tax implications of estate planning. The whole purpose of an estate plan is to communicate detailed instructions so that your affairs are handled to your satisfaction in case of death or illness.
2. Planning is the least expensive option. When it comes to drafting a will or other estate documents, often people get turned off by the fee that lawyers charge for their services. In my experience, paying a lawyer to draft a will, an Enduring Power of Attorney and a Personal Directives is the least expensive option. I’ve seen Lawyers make a lot more money when people do not have a plan and they have to try to settle disputes that arise from poorly planned estates.
3. With a Personal Directives, appoint people who are health care advocates. A Personal Directives appoints someone to make health decisions if you are unable to make those decisions. Ideally, you want someone that is going to be your advocate and make sure you are getting good care and the right advice. You want someone that will seek more than one opinion even if it requires more effort. That’s who I would want for me.
4. Have a system in the will to deal with personal assets. When it comes to financial assets, it is very common that assets are divided equally. When it comes to personal assets, dividing the grandfather clock or the diamond ring three ways typically does not work. According to Bonora, “it is usually the dividing the personal assets that creates the most trouble with families. As a result, it is important that the will provides a set of rules or a system to deal with dispersing personal assets. In this system it is also important to outline a dispute resolution process. Something as simple as in case of a dispute put your names in a hat and draw names. Making lists of personal assets can be helpful but it is not a system. It is very likely something will be overlooked.”
5. Don’t be afraid to use a trust to manage your estate. When dealing with younger beneficiaries or families of a second marriage, using a trust is very beneficial. Studies show that when people inherit money, 70% of the time, the inheritance is gone within three years. Trusts place stipulations on how inheritances can be used and when it can be used. According to Bonora, “although some people feel it is not appropriate to control money from the grave, it may be one of the best things you can do for the beneficiaries, especially if they are young.”
6. Don’t put funeral directions as part of the will. Often people think that funeral directions should be part of a will but Bonora feels that far too often the will is read after the funeral happens. Part of this is our societal belief that a will should not be read until after a funeral. Since it is important to provide funeral guidance, do it in a separate document and make sure your loved ones know where it is.
Some time ago I received an e-mail from the chief financial officer of a New York-based software company that had just bought a Canadian firm with 200 employees. They were asking for a resource to set up an equivalent to the 401k plan for their new Canadian workforce. The Canadian equivalent to the 401k is known as the group RRSP. Unfortunately very little has been written to act as a primer comparing a 401k plan to similar employee registered retirement plans for American companies that are in the process of locating in Canada, or who have acquired a Canadian company.
The story of the 401k begins in 1978 when the U.S. Congress amended the Internal Revenue Code to add section 401(k). The birth of the RRSP occurred over 20 years prior in 1957 when Parliament passed legislation amending the Canadian Income Tax Act to include these retirement plans. The plans are similar in that they allow workers to save for retirement while deferring income tax on the saved money and earn- ings until withdrawal. The normal retirement age for a 401k participant is after their 65th birthday, the earliest that a 401k participant can withdraw income is at age 59-and-a-half and the latest is age 70-and-a-half. The normal retirement date for a group RRSP member is highly flexible and may be set by the employer to be age 65 or earlier. Group RRSP participants can enjoy the benefits of a registered plan until Dec. 31 of the year they turn 71. At that time the members must convert all their RRSPs into a Registered Retirement Income Fund (RRIF) and start withdrawing money.
One of the main differences between the 401k and the group RRSP revolves around the maximum allowable employer matching contributions rules and eligibility rules. The 401k employer contributions can be a maximum of 100 per cent of an employee’s pre-tax compensation. The 401k employee maximum contribution limit for 2008 for individuals under age 50 is $15,500 and for people age 50 and older
$20,500. As of 2009, 401k maximum contribution limits will be indexed to inflation. Even if the 401k member contributes the maximum amount each year, their employer’s matching contributions are in addition to these employee limits. The maximum contribution into a group RRSP (both employer and employee) allowed by the Canada Revenue Agency (CRA) is 18 per cent of last year’s earned income of the employee, up to a maximum of $20,000 in 2008, $21,000 in 2009, $22,000 in 2010 and indexed thereafter. The rules for vesting the employer’s contributions into the 401k for the member differ greatly from the group RRSP. The vesting rule of an employer’s contributions for the 401k bylaw is six years. The group RRSP vests an employer’s contributions in the employee’s hands as soon as employee contributions are remitted to the employee’s RRSP account. However, employee salary deferrals into a 401k are immedi- ately 100 per cent vested – that is, the money that an employee has put aside through salary deferrals cannot be forfeited. When an employee leaves employment, he or she is entitled to those deferrals, plus any investment gains (or minus losses) on their deferrals.
Many American companies can rest easy knowing that an RRSP can accommodate the 401k contributions formula. Employee and employer contributions are remitted monthly for both the group RRSP and 401k. The employer will match the employee contributions. Employer matching contributions are also remitted monthly.
Within both the 401k and the group RRSP, transfers from other similar registered plans are allowed. In addition monies within these plans may be transferred out to similar registered plans as well. Both transfers into the 401k and the group RRSP and transfers out to other registered retirement plans will not trigger taxes by either the Internal Revenue Service (IRS) or CRA for their members. Participants in a 401k may be permitted to access funds from these plans subject to the rules set within the individual 401k plan text for reasons other than retirement. These allowable 401k withdraws may occur for the purchase of a primary residence or to avoid foreclosure on a primary residence. The 401k funds can also be used to pay for post-secondary schooling within a 12-month period, medical expenses and funeral expenses.
In regards to the group RRSP, registered assets are not assignable and cannot be used as collateral for a loan, except for an interest-free, tax-free withdrawal for a Home Buyers Plan or other eligible Canadian government program such as the Lifelong Learning Program. Under the RRSP Home Buyers Plan, the maximum that can be withdrawn is $20,000 and the withdrawal must be repaid into any RRSP within 15 years, in no more than 15 equal yearly installments. Although $20,000 can be withdrawn from an RRSP over four years to pay for a post-secondary education using the Life-long Learning Program, the most that can be taken out of an RRSP in one calendar year is $10,000. The participant has 10 years to repay the money borrowed from their RRSP. Required monies not repaid back into the group RRSP for either the Home Buyers Plan or the Lifelong Learning Program are taken into income by the RRSP member for that year and taxed.
Both the 401k and the group RRSP have taxes withheld on funds withdrawn out of these plans for retirement. With a group RRSP the plan must allow for withdrawals at the employee’s discretion. However, deterrents from withdrawing funds can be imposed, such as the right to future employer contributions for a period of time, if a withdrawal is made, while in the service of the employer.
In both Canada and the U.S., there are rules revolving around what employers and plan sponsors are required to communicate to their plan participants. All 401k plans must follow the Employee Retirement Income Security Act (ERISA). This is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.