Canada: Self-Funded Disability Plans: Time Running Out On Federally Regulated Employers

More than one year has passed since the federal government introduced important amendments to Part III of the Canada Labour Code.¹ When these amendments come into effect, they will force huge changes on how certain long-term disability plans are funded. Federally regulated employers had better take notice.

What is happening?

The federal government passed Bill C-38, the Jobs, Growth and Long-term Prosperity Act,² in March 2012. Since that time, there has been surprisingly little discussion about the impact of these changes. That may soon change now that the changes are expected to come into effect in the spring or summer of 2014.

Once in force, the amendments will, among other things, remove the discretion federally regulated private sector employers currently have to self-insure their employees' long-term disability benefit (LTD) plans. Instead, these employers will be required to obtain insurance coverage for any LTD plan they offer to employees.

In other words, these employers who currently self-insure or rely on an Administrative Services Only (ASO) plan will be required to engage the services of a licensed insurance company to administer and insure employees' LTD benefits. This change will have an enormous impact on certain employers in banking, transportation, and telecommunications as well as other federally regulated industries.

Why are these changes being introduced?

Legislative debates over Bill C-38 indicate that the amendments were driven by public policy concerns.³ One need look no further in this regard than the 350 disabled Nortel employees whose LTD coverage was lost in the wake of the Nortel bankruptcy because Nortel's self-funded LTD benefit plan was underfunded by approximately $50 to $75 million.⁴

As it currently stands, there is little regulation of uninsured LTD benefit plans—there is no requirement for employers to set aside adequate reserves for future liabilities or to keep funds in trust to protect LTD plan funds from creditors in the event of bankruptcy. In contrast, the insurance industry is highly regulated and provides additional safeguards for employees who rely on LTD benefits. The aim of the amendments is to ensure employees who receive LTD benefits maintain financial security in the event that their employer goes bankrupt and has underfunded their LTD plan.

What should federally regulated employers do to prepare?

While the amendments indicate that some federally regulated employers may be exempt from the changes, the applicable regulations governing these exceptions have yet to be issued. As a result, all federally regulated employers with self-funded LTD plans must take immediate steps to prepare for the possibility that an insured plan will soon be required. Once the exemptions are published, employers should consult their legal counsel to determine if they fit the criteria for the exemption and move forward accordingly.

The author wishes to thank Emily Villeneuve, articling student, for her help in preparing this legal update.

Footnotes

1. Canada Labour Code, RSC 1985, c L-2. A number of other amendments were also passed in relation to the Canada Labour Code, among other legislation.

2. Bill C-38, An Act to implement certain provisions of the budget tabled in Parliament on March 29 and other measures, 1st Sess, 41st Parl, 2012 (assented to 29 June 2012).

3. See for example House of Commons Debates, 41st Parl, 1st Sess, Vol 146, No 139 (12 June 2012) at 1645 (Hon Lisa Raitt); House of Commons, Standing Committee on Finance, 41st Parl, 1st session, No 68 (1 June 2012) at 0845 (Frank Zinatelli).

4. Barry Critchley, "Employees on long-term disability the big losers in Nortel Bankruptcy," Financial Post (13 March 2013) online:
http://business.financialpost.com/2013/03/13/employees-on-long-term-disability-the-big-losers-in-nortel-bankruptcy/.

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