Corporate healthcare trusts or medical benefit trusts, are a way of providing healthcare benefits to employees. They are sometimes used as an alternative to conventional private health insurance products, and they are often structured to resemble conventional insurance as closely as possible since that is what employees are used to.
The structure of a corporate healthcare trust can be described very simply. Conventional insurance would involve an employer paying premiums to an insurer in exchange for the insurer providing their employees with medical insurance. With a corporate healthcare trust, the employer instead pays cash to a trust which has employees – and perhaps relatives of the employees – as beneficiaries. The trust then pays for medical treatment or reimburses the employees their medical expenses.
Typically a third party will be paid to administer the trust and deal with issues such as claims handling. This third party administrator will usually be part of a big insurance group and will therefore often assist with drafting the detailed rules governing entitlement under the trust.
Although the basic structure is simply described here, the details of the trust – including who can benefit and the rules describing the benefits to be provided – can be as simple or as complicated as the employer likes.
A large employer would hope to save money by using a corporate healthcare trust instead of providing a conventional insurance scheme because they do not have to fund the insurer's profit margin – in effect, the employer is self-insuring. The trust model can also be more flexible, with the possibility of changing the benefits more regularly and more easily than is possible under a conventional insurance contract.
One of the biggest benefits is an Insurance Premium Tax (IPT) saving. Since insurance premiums are subject to IPT at 6% (increasing to 9.5% in November 2015), putting in place a structure which does not involve an insurance contract should save the employer a significant amount. However, please note the VAT implications mentioned below.
It is worth noting that this sort of structure is only suitable for relatively large employers. If you have a small number of employees then claim patterns will be harder to predict, and the trust administration will lack the necessary economies of scale.
Insurance Premium Tax
IPT is charged on premiums paid under insurance contracts and it is therefore crucial that the structure of the corporate healthcare trust does not give rise to such a contract. A significant degree of comfort can be taken from the fact that the beneficiary's rights arise under a trust, not under a contract - but this is not a complete answer since it may be possible for an unintended insurance contract to be created depending on the details of the contractual relationship between employer and employee.
In practice, there is a substantial overlap between IPT chargeability and what is considered to be the carrying on of an insurance business for regulatory purposes. Specialist regulatory advice will therefore be essential. If no FSA-regulated activities are taking place then it is highly unlikely that IPT will be chargeable.
The only likely IPT cost will come if the trustee decides to take out 'stop loss' insurance to cover unexpectedly high claims. Stop loss insurance is a conventional insurance product subject to IPT in the usual way.
Benefit-in-kind and corporation tax treatment
Assuming that the structure used secures the intended IPT saving, an employer's main aim will generally be for benefit-in-kind tax and National Insurance Contributions (NICs) to be calculated the same way as they would be for a conventional insurance scheme - based on the cost per employee incurred by the employer. What the employer will want to avoid is for employees to be taxed based on what comes out of the trust to individuals, since this would have the inequitable result of causing higher tax bills for individuals who need to call upon the trust more.
The way to achieve this is to make sure that the benefit being provided to the employer is the 'right to reimbursement' of specified medical expenses rather than the actual reimbursement itself. HMRC has produced guidance on the conditions that must be satisfied in order to achieve this result:
- the trust must confer on each employee an absolute right to reimbursement of specified medical treatment – this means that only a trust which is fundamentally non-discretionary will satisfy HMRC conditions;
- the employer's annual contribution for each employee must be identifiable –contributions per employee made by the employer should generally be calculated ina similar way to insurance premiums, based on predicted claims per employee per claim year;
- contributions to the trust must be irrevocable, and the employer must be excluded from benefiting;
- the trust cannot be terminated before all claims for treatment for periods for which contributions have been made by the employer have been met;
- it is a term of the arrangements that no change can be made that would result in one of these conditions being breached.
Corporation tax deductions should be available to the employer on contributions paid into the trust.
Although IPT costs will be significantly reduced, the trust administrator is likely to be making standard-rated supplies of a service as part of the trust arrangements. If the employer cannot recover VAT generally, then no VAT recovery will be possible in respect of the trust arrangements. If the employer is entitled to partial or full VAT recovery on its overheads, then there are two ways in which that recovery might be sought:
- if the trustee is a corporate entity, and a member of the employer's group, then the trustee itself should be able to register for VAT - as part of the employer's VAT group - and recover the VAT. This route relies on the fact that in certain circumstances HMRC will allow a single VAT registration to cover both trustee and non-trustee activities (as with pension trustees).
- otherwise, the parties can attempt to structure the administration agreement as a three-way one between trustee, employer and administrator, in such a way that there is a provision of services to the employer in respect of which the employer can recover the input tax.
As long as only the employer entity (or entities in the case of a group of companies) contributes to the trust, and the employer is not a close company, then contributions to the trust will not be 'chargeable transfers' for inheritance tax purposes. If the employer is a close company – one with fewer than five controlling parties – then, as with all employee benefit trusts, additional care will be required when drafting documents.
It should also be possible to structure the trust so that it falls within the employee trust exemption from periodic inheritance tax charges, as the beneficiaries of the trust will normally be limited to past and present employees or officers of the employer group and their relatives.
Sharing the cost
It is a common feature of many corporate healthcare trusts – as well as conventional health insurance schemes – that the employer will permit relatives to be covered as well as employees in exchange for a contribution from the employee. This contribution, which may or may not represent the full marginal cost to the employer, can be structured in a variety of ways. From a tax point of view, it is better for employees to make their contributions by way of salary sacrifice – waiving their right to an amount of salary and the employer making an additional contribution – rather than the employee making a contribution to the employer or trust out of taxed income. This is because the receipt of the benefit will only be subject to class 1A NICs, whereas the sacrificed salary will be subject to class 1 NICs.
There are potential implications of a direct employee contribution into the trust, including inheritance tax. Such a structure could also give rise to additional regulatory concerns, and so should be considered carefully.