AN EMPLOYER S GAME PLAN FOR THE 2018 FEDERAL BUDGET

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1 AN EMPLOYER S GAME PLAN FOR THE 2018 FEDERAL BUDGET The recently released 2018 Federal Budget (Budget) covers ground that relates to employee benefits. The Budget s entire text is available at This update will discuss the provisions that may affect your employee benefits plan designs. HEALTH AND WELFARE BENEFITS Parental Sharing Benefit: Effective June 1, 2019, eligible individuals will be provided with five or eight additional weeks of parental leave as included under the Employment Insurance (EI) Maternity and Parental Benefits program (Program). The additional leave is only available if both parents agree to take at least five weeks of parental leave through the EI Program. Under the EI Program, those individuals who activate the standard parental option are allowed a maximum parental leave of 35 weeks at 55% of their insurable earnings. With this enhanced benefit, the percentage of insurable earnings remain the same but the individual is allowed an additional five weeks of leave or a maximum of 40 weeks. Similarly, those individuals who activate the EI Program s equivalent rule option are allotted a maximum of 61 weeks of parental leave but at 33% of their insurable earnings. Under this enhanced benefit, the percentage of insurance earnings remain the same but only the second parent is allowed an additional eight weeks of leave. If both parents do not agree to take at least five weeks of parental leave, then the enhanced benefit of either five or eight weeks is not available. All two-parent families are eligible for this new benefit, including adoptive parents and same-sex couples. However, Quebec residents are excluded due to the province s own Parental Insurance Program. What can employers do now in preparation of these changes? Employers should examine their existing documents that communicate parental leave to existing employees and new hires. Included in this examination, the employer may want to

2 implement an additional notice requirement in the event an employee chooses to take advantage of this additional leave option. If both parents work for the same employer, notice should be provided to the employer from each employee, including any proposed sharing process that the parents may exercise (e.g. if using the standard method, first parent will take 20 weeks and the second parent will take the additional 20 weeks after the first parent returns to work, etc.). This additional information should assist the employees supervisors with their ability to direct workloads during these absences. For additional information concerning the EI Program and the various leave programs by province, please see our 2018 Canada Reference Guide, available here: Health and Welfare Trusts (H&WTs): The Income Tax Act (Act) created the H&WT as a method for employers to fund health and welfare benefits. Unfortunately, the Act does not include formal guidance on the tax treatment for these trusts. But, over the years, the Canada Revenue Agency (CRA) has provided regular administrative guidance for employers that fill in the blanks on many issues that the Act did not cover, such as what type of trusts qualify for an H&WT and how trust income is to be taxed. The Budget effectively terminates H&WTs. It does this by halting any new guidance from CRA for new trusts established on or after February 27, 2018 or for existing HW&Ts after Transitional guidance concerning this termination process will be released later this year and should address such matters as: Streamlined conversion of existing H&WTs to other possible trust options, such as an Employee Life and Health Trust (ELHT); Whether H&WT assets can rollover into a new trust entity; and Any potential tax issues for H&WTs that may continue to exist by either not transitioning into an ELHT or not rolling over into a new trust entity. However, the Budget does outline that those H&WTs that do not either convert or rollover will cease receiving preferential tax treatment and, instead, fall within the normal income tax

3 bracket for trusts. This change in tax treatment would impact both plan sponsors and plan members. Now would be a good time for employers to determine whether their H&WTs are eligible for ELHT status. Many of the rules for ELHTs and H&WTs are similar but there are some critical differences (e.g. rules surrounding the treatment of surplus income and pre-funding of benefits, etc.) that should be examined in light of the current arrangement. It may be worth examining what steps are possible to take, if necessary, for the H&WTs to become ELHT eligible, if at all. Special consideration should be given to those elements that are indirectly influential on the employer s employee benefit plan design, such as potential union negotiations, stakeholder positions, third party administrator capabilities and other related vendors concerns. National Pharmacare: There is a great deal of concern about the high cost of prescription drugs and the effects of their unaffordability on the health status of Canadians. The Budget taps Erik Hoskins, Ontario s former Minister of Health, to head a newly created organization, the Advisory Council on the Implementation of National Pharmacare (Council). The Council will collaborate with different regional and national experts and leaders to assess the economic and social benefits of different pharmacare models. The Council will then provide recommendations for a national public program. Despite the lack of a formal timeline to complete this process, the Budget does indicate an intent for the Council to provide detailed proposals during If a pharmaceutical program has not been reviewed in the recent past (i.e. 12 to 15 months), now would be a great time to meet with a Gallagher consultant to review the existing program. Gallagher can review issues related to the list of drugs and formularies that are covered by the program, actual usage, trend analysis and other innovative and responsive methods. This information will provide an employer with a tangible understanding of the impact that these proposals may have on their employee benefits plan design.

4 Cannabis Regulation: Last year, the federal government passed legislation that legalized the sale and use of cannabis for both recreational and medicinal purposes. The government and each province was charged with creating their own regulatory guidance for this law s implementation. Budget 2018 focuses on the government s development of a special excise tax for manufacturers on non-medical purpose cannabis products only. In furtherance of an agreement between the government and the majority of the provinces, this excise tax will be shared amongst the entities at a rate of 75% for the provinces and the remaining 25% for the government. The government s portion will also be capped at $100 million for the first two years after legalization as a means to assist the provinces with establishing and regulating their own cannabis guidance. In addition, Budget 2018 formalizes the requirement that cannabis cultivators and manufacturers must obtain a cannabis license from the CRA. This registration process will assist with determining such things as the cannabis product s purpose (i.e. medical versus nonmedical) and tetrahydrocannabinol (THC) levels as the higher excise tax will only apply to those products with higher levels of this chemical compound. Coloured stamps will be affixed to the products to identify the province(s) where the product is eligible to be sold. Anticipated updates to the Excise Act, 2001 will provide more specific, statutory guidance on the application and collection of this excise tax. Now may be a good time to confirm that plan related documents properly outline the plan s policies for cannabis usage for medicinal purposes. In addition, because of the legalization of recreational cannabis, employers should update their human resource policies and employee handbooks to ensure that employees are aware of standardized expectations of cannabis usage in the workplace. Such policies and handbooks may also want to include language that identifies the different requirements for medical versus nonmedical usage and the implications for the failure to properly adhere to these policies.

5 RETIREMENT AND PENSIONS Canada Pension Plan (CPP): Beginning January 2019, enhancements to the CPP will go into effect. These enhancements were the result of an agreement between the government and the provinces, excluding Quebec because the province has its own Quebec Pension Plan (QPIP), as a method to quash Ontario s attempt to develop its own complimentary retirement pension plan. The Budget highlighted the following enhancements as changes that will affect the CPP s contribution rates and for which guidance and legislation will be soon released: Adoption of a drop-out years provision that will remove from consideration for CPP maximum benefit eligibility certain years where parents ceased working in order to care for young children or individuals were unable to work due to prolonged periods of severe disability; An increase of the pension amount to a full survivor pension for individuals under the age of 45 who have lost their spouse; Development of a top-up disability benefit for eligible disabled persons under age 65; and An increase of the death benefit to the maximum of $2,500 for all eligible contributors. The CPP s enhancements are scheduled to come in waves. Therefore, employers should ensure that their documents concerning the CPP have been properly updated to reflect these upcoming amendments. It may be prudent to confirm that administrative processes are prepared to adjust the contribution amounts due from employers and employees. Lastly, if communication to employees has not occurred, it may be a good idea to let employees know that they may expect changes in their take-home pay starting in January 2019 because of these enhancements.

6 Quebec Pension Plan (QPP): Operating solely in Quebec, the QPP provides benefits similar to the CPP for those individuals that reside within Quebec. The most notable difference between the CPP and the QPP are the eligibility requirements and maximum payable pension amounts for the benefits. As the CPP recently adopted enhancements to the amount that employees must contribute, so too did the QPP. The Budget calls for an amendment to the Act so that employee contributions to the enhanced portion of the QPP will also be eligible for the same tax deduction that will be available for employee contributions to the enhanced portion of the CPP. Employee contributions to the non-enhanced portions of the QPP and CPP will continue to be treated as tax credits. Administrative processes should clearly define the difference between enhanced and nonenhanced employee contributions to both the CPP and the QPP. Communication should be provided to assist employees with understanding the difference between the tax credits that they are accustomed to receiving for their contributions versus the new tax deduction. Pension Insolvency and Unpaid Pension Balances: Employers that declare bankruptcy are usually unable to make any additional contributions to a partially funded pension plan. The result is that employees, who have relied upon the employer s representations of their retirement benefits, are left with a significant economic hardship. Alternatively, the lack of a uniformed method to handle unclaimed pension balances results in several individuals missing out on retirement income. Eventually, in many provinces, unclaimed pension balances end up being transferred to a government agency when missing members never come forward to claim their monies. In response to both of these issues, the Budget promises further discussion and possible legislation to address their respective, unique concerns. Specifically, for pension insolvency, the government is looking for a method to balance the devastating economic effects on employees with partially funded pensions while also addressing the economic hardships for small

7 businesses that may have to declare bankruptcy. Further, for unpaid pension balances, the Canadian Association of Pension Supervisory Authorities (CAPSA) has been tasked with the duty to review current practices for locating missing members and develop possible future guidance for plan administrators. Employers with pension plans must perform regular compliance and funding reviews. Concerning solvency, annual funding reviews will assist the employer with determining funding status and, if necessary, develop a proper plan of action to get the plan back on track. Employers who may be considering bankruptcy should understand the effect that this course of action could have on the pension plan and its members. Timely and effective communication (e.g. individual communication of account balances and expected payments upon retirement) should be provided to assist employees with handling their financial affairs. Further, financial and mental wellbeing assistance for employees may be very necessary and welcomed during this difficult time. Annual compliance reviews of pension plans should also include a review of missing member accounts. In the absence of uniform guidance, employers should document the efforts that they have undertaken to reconcile these missing monies with their owners. Ideally, employers should confirm the current address of record for all pension members with account balances and note which members addresses appear to be incorrect. Employers may also want to document any alternative address searches (e.g. internet search) that they may attempt in order to connect with the member. COMPENSATION AND EMPLOYMENT Pay Equity, Transparency and Gender Diversity: Gender inequality and compensation has become a forefront issue for the government and the provinces. Compensation reviews have usually concluded with women making less than their male counterparts, even while working in substantially similar positions. These same reviews have also identified the lack of female leadership amongst many employers boards of directors and senior leadership. This conclusion has resulted in many provinces adopting their own pay equity legislation to encourage similar pay for similar work and more salary transparency. For example, most recently, Ontario enacted Bill 148 which includes a provision on compliance for pay equity for ongoing employees located in Ontario and also introduced Bill 203 to focus on an employer s requirement to provide compensation transparency for job applicants.

8 In response to this developing focus on gender inequity, the Budget introduces legislation to encourage pay equity for employers with 10 or more employees in federally-regulated sectors, such as banking, communications and interprovincial transportation, and federal contractors with contracts in excess of $1 million. Employees of these entities are required to receive equal pay for work of equal value without a regard to their gender, including a compliance methodology with internal annual audits to confirm a deliberate and conscious effort to comply with the law. Concerning pay transparency, the Budget will publically release information on the pay practices of employers in federally-regulated sectors. This information will highlight any wage gaps that may currently exist and encourage these employers to modify their existing compensation systems. The Budget will address the lack of female leadership by amending the Canada Business Corporations Act (CBCA) so that federally incorporated corporations will be required to provide annual disclosures to their shareholders that address the diversity within senior management teams and boards of directors. The government will also provide public recognition for those employers that demonstrate a commitment of advancing women into these positions of influence. While it is unclear as to when this legislation will come into effect, potentially affected employers can prepare now by performing informal pay equity comparisons with existing employees salaries. Employers can also develop processes and administrative methods to track salaries or, at the very least, ease the access to relevant information for future utilization. For additional information on pay equity administrative and compliance procedures, it may be prudent to look to the provinces for guidance on their respective pay equity legislation. Most likely, any future guidance will compliment or be similar to what the provinces have already implemented. For information on pay-equity under Ontario s Bill 148, please see our PowerPoint slides, available at: Gallagher will continue to monitor this situation and provide any additional information as it becomes available. In the interim, please do not hesitate to contact your consultant if you have any questions. Consulting and insurance brokerage services to be provided by Arthur J. Gallagher Canada Limited, Gallagher Benefit Services, Inc. and/or Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as Gallagher Benefit Services of California Insurance Services and in Massachusetts as Gallagher Benefit Insurance Services. Neither Arthur J. Gallagher & Co. nor its subsidiaries provide accounting, legal or tax advice.