Healthcare Trusts: A Technical Guide

Transcription

1 Healthcare Trusts: A Technical Guide

2 Introduction Traditionally employers have provided healthcare benefits to employees through private medical insurance schemes. The employer pays a premium to an insurer and the insurer covers the costs of private medical treatment for members of the employer s scheme. The premiums paid by the employer are subject to Insurance Premium Tax (IPT), currently at 6%. Corporate healthcare trusts (sometimes known as medical benefit trusts) are an alternative way of providing medical benefits to employees. Structure The structure of a corporate healthcare trust is straight forward. The employer establishes a trust fund into which the employer pays contributions to fund the company s healthcare scheme. Under the terms of the trust, the trustees receive and hold the contributions on trust to provide specified benefits to the beneficiaries of the trust. The beneficiaries of the trust are those employees who are eligible to be members of the employer s scheme. As with private medical insurance schemes, family members of eligible employees can also be brought within the scheme. The employer can decide whether the employer or the employee pays the additional contributions required to cover family members. The terms of the trust will specify the benefits to be provided by the scheme, which will be in the form of covering specified private medical expenses incurred by members of the scheme. The benefits would be set out in a schedule of benefits and accompanying rules of the scheme, which can easily be varied by the employer from time to time. Typically a third party will be engaged to administer the trust and handle claims for benefits under the trust.

3 Healthcare Trusts The legal basis for the enforceability of an insurance based scheme is that there exists a contract between the insurer and the insured. The enforceability of benefits payable under a trust is not dependent upon the existence of a contract but on the law of trusts. A trust is a familiar and well used legal device. The kinds of trust range from family trusts set up by parents for the benefit of their children and other family members through to trusts set up for charitable purposes. In the corporate world, trusts are widely used for company pension schemes and employee benefits trusts. Indeed, a corporate healthcare trust may be seen as a form of employee benefits trust. All trusts depend for their efficacy on the law of trusts as developed by and enforced in English courts. This is a well-established body of law backed up by statute. Benefits v Risk The principal risk for the employer is that the contributions paid into the trust may be insufficient to pay claims for benefits by members of the scheme. Therefore the claims fund would need to be topped up by the employer to ensure all eligible claims under the scheme are met. In an insured scheme the insurer takes this risk, whereas in a trust scheme the risk lies with the employer. It may, however, be possible to insure this risk through a stop loss insurance policy. The principal benefits of a trust scheme are the saving of IPT and the insurer s profit margin. The other principal benefit of a trust scheme is that the employer can determine what benefits it wishes to provide, rather than having to accept an insurer s product.

4 Taxation The following is a summary of the anticipated tax treatment of a healthcare trust. It is provided for guidance purposes only, and any employer proposing to establish a healthcare trust should seek its own detailed tax and legal advice before proceeding: Income Tax The income tax treatment of healthcare trusts is not set out in legislation. HMRC will accept that provided certain conditions are satisfied, the taxable benefit in the hands of employees will be the contributions paid by the employer to the trust, and not the value of any benefits or treatment received under the scheme. The relevant conditions to be satisfied are usually easily satisfied under a conventional healthcare trust. National Insurance Contributions (NIC) The NIC treatment of healthcare trusts will follow the income tax treatment, so that normally employer s Class 1A contributions are payable on the value of the contributions paid in to the scheme. Where the employee is required to make a contribution to the trust, for example to cover family members, it will be better to do this by way of the employee sacrificing an amount of salary and the employer making an additional contribution, since the contributions would be subject to Class 1A NIC, whereas the sacrificed salary would be subject to Class 1 NIC. The salary sacrifice route would also avoid potential inheritance tax and regulatory issues associated with an employee making a direct contribution into the trust. Corporation Tax A corporation tax deduction should be available to the employer on the contributions paid in to the trust.

5 Taxation continued Insurance Premium Tax (IPT) IPT applies to insurance contracts and is currently charged on premiums at the rate of 6%. A healthcare trust is not an insurance contract and no IPT would be payable on contributions to the trust. If the employer purchases stop loss insurance, IPT would be chargeable on the premiums paid for that stop loss policy. Value Added Tax (VAT) Contributions by the employer to the trust, and benefits paid out by the trustees under the trust, would not be subject to VAT. However, the fees charged by the administrator of the scheme will be subject to VAT. If the trustee is a company and a member of the employer s group then the trustee may be able to register for VAT as part of the employer s VAT group and thereby reclaim the VAT incurred. This is a matter on which specialist advice should be sought. Inheritance Tax An interest under a trust may form part of the beneficiary s estate for inheritance tax purposes. However, in practice, we understand that the interest in a healthcare trust is not treated as relevant property for the purposes of the Inheritance Tax Act. Contributions to a trust may also be treated as chargeable transfers for inheritance tax purposes. However, as long as only the employer makes contributions to the trust the contributions will not normally be chargeable transfers, although if the employer is a closed company (one with fewer than 5 controlling parties) then it would be necessary to exclude anybody with a larger than 5% stake in the company from the scheme.

6 Steps to Implementation The following is a guideline to the steps to be taken to set up and implement a trust: Step 1: Client, in conjunction with Alliance Surgical determines eligibility for membership of the scheme, benefits to be provided and the appropriate contributions. If stop loss cover is required, Alliance Surgical can introduce the client to a number of underwriters who may be willing to provide this cover. Step 2: Client enters into a non-disclosure agreement with Alliance Surgical to protect the trust documents. Step 3: Alliance Surgical provides draft trust documentation. Step 4: Client passes trust documentation to their own legal advisors for their review. Step 5: Client decides who will be the trustees. Step 6: Alliance Surgical provides the final Trust Deed and Administration Agreement for signature. Step 7: Client obtains any further legal advice required and submits documents to HMRC for clearance. Step 8: Client and trustees sign Trust Deed and Administration Agreement. Step 9: Client sets up a separate bank account for the trust funds and pays initial contributions into the trust fund. Step 10: Client pays initial administration charge to Alliance Surgical Corporate Health Limited. The trust is now fully established and ready to pay out benefits.

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