Pensions & Benefits Law : Canada Pension & Benefits Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm: Post-Employment Benefits & Defined Benefit Plans : Toronto, New York

The Minister of Finance recently announced proposed amendments to the Income Tax Act creating a new vehicle, called an employee life and health trust (EL&H trust), through which employers can provide certain group benefits to their employees and former employees in a tax effective manner.

While many of the rules in the proposed amendments regarding EL&H trusts are similar to existing law and policy for health and welfare trusts (H&W trusts), there are a number of interesting new provisions, including the following: 

• Clearly setting out the timing for claiming a deduction for employer contributions to an EL&H trust in respect of employee benefits to be paid in a future tax year. Specifically, the portion of any pre-funding that relates to benefits payable in a future tax year may only be deducted in that future tax year.
• Permitting an EL&H trust to treat employee benefit payments as expenses and apply special rules to allow the carryback and carryforward of losses where the trust's expenses for a particular year exceed its revenue. (Under the current rules for H&W trusts, benefit payments in excess of the trust’s income for the year are treated as distributions of trust capital with no other income tax impact.) 
• Specifically addressing employer contributions to an EL&H trust by way of a promissory note and prescribe the timing for claiming deductions for payments of principal and interest under the note.

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The Canadian government recently tabled its budget for 2010, which proposes significant changes to the way in which both employees and employers are taxed in Canada on stock options, including:

• elimination of the deferral for public company stock options;
• restrictions on the deduction for the cash out of stock options; and
• special relief for tax deferral elections.

For more information on these changes to the taxation of employee stock option plans, see the Osler Update: Budget Briefing 2010. 

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Many compensation and pension actions require the approval of a company’s board of directors, or a committee of the board, and for good reason. Employers should not skimp on the finalization of corporate approval via signed and dated board or committee resolutions.

U.S. Case in Point: A federal judge in New York recently denied enhanced retirement benefits to the CFO that would have been due to him under the terms of an amended SERP because the board resolutions from seven years before his retirement seem to have never been finalized. The court ruled against the executive seeking benefits, despite the undisputed facts that the board had agreed “in concept” to the SERP enhancements and that two other executives had been paid out under the amended plan terms. The reason? Under the terms of the SERP, only the Board could amend the plan and the Board never formally approved the amendments.

Now, we’ll never know from the facts in this case whether the failure to approve the amendments was due to administrative oversight, or, as defendants alleged, wrong-doing by the executives in their attempt to amend the SERP for their personal benefit. Plus, in this case, there is the added background fact that defendant (an acquirer of the plan sponsor) is now in bankruptcy, which shouldn’t, but sometimes does, influence a court’s opinion. But as a practical matter, executives nearly always direct the design and implementation of benefit plan changes, even when they are participants. Therefore, executives should be mindful of their fiduciary duty to their employer as they navigate this conflict of interest.

There is a take-away lesson from story: Always follow corporate formalities through to completion when adopting or changing compensation plans – including signatures and dates with unambiguous approval language. Further, don’t forget to formally delegate authority to officers to finalize or change amendments, whenever delegation is appropriate.

Special thank you to Michael Melbinger for bringing this new case to my attention.

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Later this month, the Supreme Court of Canada will hear an appeal from the British Columbia Court of Appeal’s decision in Withler v. Canada. The issue in Withler is whether a supplementary death benefit under a pension plan that is reduced for every year the plan member’s age exceeds a specified age violates the right to equality under section 15 of the Charter.

If the Supreme Court overturns the Court of Appeal decision and rules that this death benefit is discriminatory and contrary to the Charter, public sector plans which use age-based criteria to calculate certain benefits could find themselves facing a similar Charter challenge. Similarly, an adverse ruling by the Supreme Court could potentially be used in the private sector as a new basis to argue that the use of age-based criteria in pension plans violate provincial and federal human rights legislation.

The Withler case arose as a class proceeding, which was initiated by the surviving spouses of deceased members of the Public Service Superannuation Act (the PSSA) and Canadian Forces Superannuation Act (the CFSA). The spouses received a supplementary death benefit (SDB) upon the death of the member, the amount of which differed depending on the age of the plan member. Provisions in the PSSA and the CFSA permitted a 10% reduction in death benefits for every year the plan member exceeded age 65 (for the PSSA) or age 60 (for the CFSA). The surviving spouses argued that the reduction provisions constituted age discrimination, contrary to s. 15 of the Charter.

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A recent decision from the Ontario Human Rights Tribunal has confirmed that an early retirement package which was offered to employees who met certain age requirements did not contravene the Ontario Human Rights Code.

In Kovacs v. Arcelor Mittal Montreal, the employer decided to close a plant as a part of a filing under the Companies’ Creditors Arrangement Act. The employer had negotiated an early retirement package with its union. To be eligible for the negotiated early retirement program an employee had to satisfy one of the following requirements: (i) have 30 or more years of service; (ii) be older than age of 55 with 15 or more years of service; or (iii) be at least 52 years of age but less than 55 years of age with 25 or more years of service.

Mr. Kovacs, an employee at the closing plant, did not satisfy any of the eligibility requirements since he was 47 years old and had only 27 years of service. He launched a human rights complaint, arguing that he had been subject to discrimination on the basis of age.

The Tribunal noted that early retirement plans, which may contain eligibility requirements based on age, are common in unionized workforces and that they provide “superior benefits to older, long service employees; individuals who may experience greater difficulty in obtaining alternative employment if permanently laid-off.”

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Does your U.S. group health plan have separate deductibles for medical benefits and mental health benefits? Even if they are the same dollar amount, new regulations provide that these plan provisions will violate federal benefit parity requirements.

Sponsors of U.S. group health plans who have been preoccupied with COBRA premium subsidies and new state COBRA requirements may have missed the October 3, 2009 effective date of new mental health and substance abuse benefit rules. (They apply as of January 1, 2010 for non-union calendar year plans.)

While U.S. law does not require employers to provide mental health or substance abuse benefits to their employees, employers who include these benefits in their U.S. medical plans are subject to a host of new requirements under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008  (PDF) (the Act). The Act expanded parity requirements of 1996 legislation, which required that annual and lifetime limits for mental health benefits could not be more restrictive than the limits that applied for medical and surgical benefits, to also require parity in financial restrictions such as deductibles, co-pays, out-of-pocket maximums and treatment caps, such as visit limits, and to include substance abuse benefits.

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Trustees and other fiduciaries are often described as having to act fairly in discharging their responsibilities to pension and health and welfare plan members. While most people have a strong sense of what is generally fair and unfair, the concept becomes more complicated when it is applied to the interests of a single member relative to a group. What may seem fair to an individual may be unfair to the group as a whole. In dealing with such situations, fiduciaries must take care to act honestly and in a way that is even-handed, having regard to what is fair and reasonable for the entire group of beneficiaries for whom they are responsible.

A recent decision of the Nova Scotia Supreme Court in Downey v. Cranston provides a useful example of this principle.

Terrence Downey, who had worked as a non-union longshoreman for 26 years on the Halifax waterfront before becoming a member of the union in July 1991, became permanently disabled following a workplace injury in December 1991. Mr. Downey claimed a disability pension under the Halifax Port ILA/HEA Pension Plan (the Pension Plan) and benefits under the Halifax Port ILA/HEA Health and Welfare Trust Fund Benefits Plan (the Welfare Plan), both of which he had become eligible to join as a union member, subject to satisfying certain minimum work requirements (300 hours of work in the year for the Pension Plan and 450 hours of work for the Health and Welfare Plan).

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In the last two years, four provinces (Alberta, British Columbia, Ontario and Nova Scotia) and the Federal government have embarked on extensive pension reviews. While the focus of these reviews, for the most part, was on how each jurisdiction’s pension standards legislation could be improved, the reviews also considered increasing pension plan coverage for employees who do not have access to an employer sponsored pension plan. There has been some activity in the new year on this latter initiative, most recently with the release of the British Columbia Ministry of Finance’s consultation paper “Mechanisms for Expanding Pension Coverage and Retirement Income Adequacy in Canada” (PDF).

The consultation paper follows on the heels of the paper of the Steering Committee of Provincial/Territorial Ministers on Pension Coverage and Retirement Income Adequacy, “Options for Increasing Pension Coverage Among Private Sector Workers in Canada”, (PDF) which analyzed two proposals for increasing pension coverage in Canada through a national pension plan, namely: (a) creating a voluntary, defined contribution structure either added as an additional “tier” to the Canada Pension Plan or as a stand-alone plan; and (b) expanding the existing mandatory defined benefit structure of the Canada Pension Plan either by increasing the replacement rate or the upper limit on income on which the pension is calculated or both.

The British Columbia consultation paper also explores two additional options. First, the consultation paper considers modernizing current pension standards legislation to improve flexibility in pension plan design, for example, by permitting an entity that is not an employer, such as a professional association, to sponsor a pension plan. Second, the consultation paper considers amending the Income Tax Act to encourage increased retirement savings under current registered retirement savings vehicles, for example, by allowing individuals to repay amounts withdrawn from registered retirement savings plans in times of financial hardship. The consultation paper further notes that a blended approach, combining two or more of the four options, could be desirable.

The landscape for pensions and retirement savings in Canada may be changing if these recommendations are acted upon. If and when changes are made, it will be necessary to review how existing employer sponsored arrangements integrate into such landscape.

Comments on the British Columbia consultation paper are being sought by April 1, 2010.

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Paul Litner's post Plan Communications: The New Battleground for Pension Disputes highlighted recent cases, which reinforced the need for employers to make accurate and timely pension plan member communications a top priority in plan governance and risk management. The recent Re Greyhound Canada Transportation Corp. and Amalgamated Transit Union arbitration, where the employer was found liable for failing to provide commuted value calculations to a member, is yet another case which highlights this need.

In this case the member in question had requested information on the commuted value of his pension with a view to retiring. However this information was never provided and he died the following year. The spousal benefit on his death was approximately $185,000; whereas, had he elected prior to his death to retire and take the commuted value of his pension he would have received approximately $261,000. The union then launched a grievance requesting that the differential between these amounts be paid to the spouse.

Based on his review of the case law, the arbitrator found that Greyhound was under a fiduciary duty to provide employees with the information in its possession “affecting their financial futures”, including commuted value calculations for those employees facing retirement. In addition, the arbitrator noted that the parties had negotiated a Letter of Understanding, dated January 1, 2008, which required Greyhound to provide the commuted value information. The Letter provided: “Effective January 1, 2008 an employee will once in their career and at retirement be provided with pension value information. This would include the commuted value.”

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