Payments from a wage-loss replacement plan

You may be looking for:

• Premiums and contributions to insurance plans

You (as the employer) may have a wage-loss replacement plan (WLRP) which indemnifies employees against a loss of employment income as a result of sickness, accidents, or maternity.

On this page

• Steps
• References

Steps

1. Determine if the plan is considered a WLRP

   A WLRP is an arrangement between an employer and employees, or an employer and a group or association of employees, which provides for the payment of periodic benefits to employees who suffer a loss of employment income as a result of sickness, maternity, or accident.

   A WLRP may provide short-term disability, long-term disability, or weekly indemnity benefits. The benefits may be paid by the employer or by an insurance company, trustee, board of trustees, or other independent organization.

   A plan is considered a WLRP only if it meets all of the following conditions:

   • It is a group plan, in that it covers more than one employee
   • The plan is funded, in whole or in part, by the employer
   • The purpose of the plan is to indemnify employees against a loss of employment income as a result of sickness, accident, or maternity
   • Benefits are paid on a periodic basis, not as a lump-sum
   • It follows insurance principles that funds are accumulated, normally in the hands of a trustee or in a trust account, and are calculated to be sufficient to meet anticipated claims

   If the plan is not a group plan (it is for a single employee) or if the plan is funded entirely by employee contributions (an employee pay-all plan), it is not a WLRP. Any premiums you pay may be a taxable benefit.

   Learn more: Premiums and contributions to insurance plans and Interpretation Bulletin IT‑428, Wage Loss Replacement Plans

   What is the EI premium reduction program if you provide a WLRP for short term disability to your employees

   If you provide a WLRP for short-term disability to your employees, you can apply for a reduced employment insurance (EI) premium rate through Employment and Social Development Canada (ESDC).

   Once approved by ESDC:

   • You will have a reduced EI premium rate that is less than the standard 1.4 times the employee premium (for example, 1.24 times)
   • Your reduced rate will only apply to employees who are covered by the approved plan, including employees serving an eligibility period under the plan of three months or less

   Learn more on how and when to apply for a premium reduction through ESDC, including what you have to send with your application: EI Premium Reduction Program: For employers.

   •  If the plan does not meet all of the above conditions, do not continue to the next step.

   • If the plan meets all of the above conditions and is considered a WLRP, continue to: Step 2 – Determine if you need to deduct CPP contributions and EI premiums from a WLRP payment.

2. Determine if you need to withhold CPP contributions and EI premiums from a WLRP payment

    You (as the employer) must withhold Canada Pension Plan (CPP) contributions and EI premiums from WLRP payments you make when any of the following situations applies:

   • You pay benefits directly to your employee from a WLRP that you fund in whole or in part

   • A trustee, board of trustees, or insurance company pays benefits on your behalf to your employee through a WLRP, when you do all of the following:

     • Fund any part of the plan
     • Exercise a degree of control over the plan
     • Directly or indirectly determine the eligibility for benefits
     Withholding and reporting requirements when benefits are paid by a third party

     When benefit payments are made by a third party (such as a trustee, a board of trustees, or an insurance company) who is not the actual employer, the third party can be deemed to be the employer. The actual employer is the party that is liable to pay the employees.

     The Canada Revenue Agency (CRA) can hold both the actual employer and the deemed employer responsible for CPP contributions and EI premiums not withheld. Employers and third-party payers should communicate and agree on which party will withhold, remit, and report these amounts.

   What if you are not sure if these payments are subject to CPP contributions and EI premiums

   If you, your employee, or the third party are not sure if these payments are subject to CPP contributions and EI premiums, any one of you can request a CPP/EI ruling.

   Learn more: Request a CPP/EI ruling

   •  If neither of the two situations apply to WLRP, do not withhold CPP contributions or EI premiums from the payment.

     For example, when the employer:

     • Does not exercise a degree of control over the plan
     • Does not directly or indirectly determine the eligibility for benefits

   • If one of the two situations applies to the WLRP, withhold CPP contributions and EI premiums from the payment.

     Learn more: Calculate CPP contributions deductions and Calculate EI premiums deductions

3. Determine if you need to withhold income tax from a WLRP payment

    You (as the employer) must withhold income tax on all WLRP payments you make.

   Learn more: Calculate income tax deductions

4. Determine which deductions you need to withhold if you provided additional top-up amounts

   You (as the employer) may choose to pay an additional top-up amount to your employees when the WLRP payments do not equal their normal salary or wages.

   • •  Top-up amounts are not insurable if they are paid to the employee directly by the employer while the employee is receiving WLRP payments from a third party acting as an independent third party and not on behalf of the employer. In this situation, do not withhold EI premiums from the payment.

     • Top-up amounts are insurable in any other situation. You must withhold EI premiums from the payment.

   • Top-up amounts are pensionable. You must withhold CPP contributions from the payment.

   • Top-up amounts are taxable. You must withhold income tax from the payment.

5. Report the payment on a slip

   You must report WLRP payments on a T4 or T4A slip depending on whether CPP or EI deductions were required to be withheld. You must report any additional top-up amounts on a T4 slip.

   • T4 slip – CPP and EI deductions required

     If you were required to withhold CPP contributions or EI premiums (or both), you must report the payments on a T4 slip:

     • Box 14 – Employment income
     • Box 24 – EI insurable earnings
     • Box 26 – CPP/QPP pensionable earnings

     Learn more: T4 slip – Information for employers

   • T4A slip – CPP and EI deductions not required

     If you were not required to withhold CPP contributions or EI premiums (or both), you must report the payments on a T4A slip:

     • Code 107 – Payments from a wage-loss replacement plan

     Learn more: T4A slip – Information for payers

References

Related

Wage-loss replacement plans – CPP and EI explained

Legislation