Paula Hargaden, senior associate at Burges Salmon LLP, examines the ins and outs of a corporate healthcare trust
The recent issue of Reward encourages employers to consider self-insured healthcare trusts as an alternative to private medical insurance. Self-insured trust can save costs. This is significant given that the trend for increasing insurance premiums will be exacerbated by the rise in Insurance Premium Tax (IPT) taking effect this month.
However, because self-insured arrangements are based around a trust, they can appear to be a bit mysterious! If we look a bit more closely at some of the legal aspects of these arrangements, it may help to clarify their benefits for mid-sized businesses.
What is a self-insured trust arrangement?
A traditional insured arrangement is based on a contract of insurance - the employer pays a premium for a policy to cover healthcare for selected employees. The insurer will, of course, set premiums at a level to reflect predicted claims, changes in its own costs and to ensure it receives a margin of profit.
A self-insured trust is different due to its underlying structure. The employer pays contributions (the equivalent of premiums) into a trust which pays out for specified healthcare benefits. There is no profit margin to consider when the necessary contribution is calculated and if contributions exceed claims in any year, the surplus is retained in the trust. Claims for treatment are paid for by the trustees out of the trust fund. An administrator is usually paid to administer the benefits and process the employee’s claim in the same manner as an insured arrangement. From the employee's perspective, a self-insured trust can appear identical to an insured benefit.
Why does it matter that it is a trust?
A trust is legally a relationship - not an entity in its own right like a company or an individual. In a healthcare trust, the legal relationship is created between the contributing employer and the trustees. The trustees agree to manage the contributions (or trust fund) according to the promise made between the employer and the trustees (the trust deed) for the beneficiaries of the trust (selected employees). Getting the trust deed right at the outset is important because it frames the relationship between the trustee and employer including setting out the rights and obligations of the trustees and the employer.
Making changes to the trust deed is not as simple as making changes to a contract because the interests of the beneficiaries, the purpose of the trust and the duties of the trustee/s all have to be taken into consideration. The special trustee duties (which apply to both corporate and individual trustees) must be considered when the trustee makes decisions in exercising any powers the trustee has under the trust deed. In practice, trustees delegate much of their powers to the administrators and, in those circumstances, the trustees’ main role is to provide oversight.
Whilst the trust deed can't be changed like a contract, it is the flexibility of a trust that provides the benefits of self-insured arrangements and helps mitigate commercial risk.
The structure provides benefits and helps mitigate commercial risk
Traditionally, employers seek to manage increasing premiums by restricting the benefits that are covered, or by introducing an excess. However, this decreases the value of the benefit to employees – employees find it more difficult to access healthcare or find that certain treatments are simply no longer covered.
Because in a self-insured arrangement the employer can choose to set the benefits covered, employers can control cost in a way more suited to its own bottom line, whilst maximising the value of the benefit. With a self-insured arrangement an employer has a wide flexibility to tailor benefits to meet the needs of its particular workforce (for example, back care benefits to address higher than average sick days lost to back pain symptoms).
Where an employer self-insures, it takes on risk. The main risk taken on by employers using trust arrangements arises from there being insufficient funds in the trust to cover unpredictable claims. This is why traditionally such arrangements have been sold to large employers with the members and claims history which provide a predictable claims profile.
Happily, with the flexibility offered by the trust structure there are a number of ways to mitigate the risk of unusual claims. These include stop loss insurance and claim caps. There are also more innovative products coming out into the market targeted at mid-size businesses including ‘corporate excess’ products which operate to fix a limit on the claims paid out of the trust fund in any one year. In some cases, the limit is set at the contributions made.
More fundamentally, any surplus contributions are retained by the trust and so ‘good' claim years can build up a buffer against ‘bad’ claim years. This means there is a real incentive for trustees to ensure there is effective claims 'triage’, as the trust fund directly benefits.
The trust structure provides the tax saving
It is the trust structure which allows the employment tax treatment of a healthcare trust to be the same as private medical insurance, but with an IPT saving. HMRC has specified that the trust deed must provide that the:
- employee has an absolute right to specified medical treatment paid (in other words, payments are not at the discretion of the trustees);
- contributions paid in respect of each employee must be identifiable; and
- employer cannot benefit from the trust fund, nor can it get contributions back.
Provided these and other requirements are met it is the contribution paid into the trust, as allocated to that employee (and not the amount paid out for treatment pursuant to a claim) that is treated as the amount taxable as a benefit-in-kind in the hands of the employee. Contributions do not, unlike an insurance premium, attract IPT.
Payments to a provider to administer the benefits and manage claims will have VAT applicable, but depending on how an employer sets up the trustee this may be recoverable. Contributions to the trust should be deductible for corporation tax purposes.
Other legal issues to consider
When an employer sets up a new self-insured trust there will be other legal issues to consider. Moving from an existing insured to self-insured medical benefits arrangement might be a change in the employer’s promise made to employees in their contracts and this change will need to be managed. Employers will want to be clear in their communications to employees about the nature of the new benefit, to prevent any contractual connection being made between the employee and the trustee. Arrangements benefit from ongoing good governance and training for trustees where appropriate. As with insured arrangements, employers will want to ensure good protection for their employees’ personal data. Finally, the choice of administrator will be key and care should be taken in negotiating terms with these, (particularly where provider templates are used), to ensure risk is properly allocated between the employer and provider.
In conclusion, whilst healthcare trusts can appear complicated, once the legal structure sitting behind them is ‘de-mystified’, hopefully their commercial attractions become plain, particularly to mid-sized businesses.