Northern Exposure

Insuring long-term disability insurance

by Richard E. Johnston

In Canada, benefit plans are subject to legislation related to income tax, human rights, and employment standards. However, there is little specific regulation of benefit plans other than pension plans. A key exception is the provision of long-term disability benefits that are not funded under an insurance contract—at least for federally regulated employers such as the banks, airlines, inter-provincial trucking companies, and employers in Ontario.

Background

Apart from the provincial statutory schemes regarding workers’ compensation and the disability benefits provided under other government programs, a Canadian employer may choose to provide employees with disability benefits. Most Canadian employers that provide long-term disability benefits do so through insured plans. However, Canadian life and health insurers have in the past indicated that at least 10 percent of Canadian employees entitled to long-term disability benefits are under uninsured plans.

When an employer provides disability benefits that are not insured, there is a risk that the benefits will not be paid in the event of insolvency of the employer. That brings serious consequences for former employees relying on those benefits. This issue has come to public attention over several decades upon the insolvency of several high-profile employers.

Changes to Canadian bankruptcy legislation to protect uninsured disability benefits were considered but not adopted. Instead, changes to the Canada Labour Code and Ontario’s Insurance Act have added protections.

New federal requirement

As of July 1, 2014, for employees subject to the Canada Labour Code (rather than provincial employment legislation), every employer that provides benefits to its employees under a long-term disability plan must insure the plan with a licensed insurer. If, before that date, an employer provided benefits under a long-term disability plan that was not insured, it may continue to provide benefits under that plan but only to each employee who before that date was being paid benefits or submitted an application for the payment of benefits.

New Ontario requirement

Also in July 2014, Ontario passed changes to the Insurance Act (Ontario) with similar effect for all other employees in Ontario, to come into effect on a date to be determined. When that comes into force, no person shall provide long-term disability benefits in Ontario unless the benefits are:

  • Payable under a contract of insurance undertaken by a licensed insurer; or
  • Provided under a registered pension plan.

For this purpose, long-term disability benefits means payments or benefits payable to an individual for a period of not less than 52 weeks or until recovery, retirement, or death, whichever period is shorter.

Other provinces

It remains to be seen whether other provinces will adopt similar requirements. Both Alberta and British Columbia already require disclosure by an employer to its employees where disability benefits are not insured. While this may encourage bargaining over disability benefits, no protection is provided for uninsured benefits in the event of insolvency of the employer.

Required action

The shift to mandatory insurance of disability benefits will reduce flexibility for employers that have provided benefits on an uninsured basis. To ensure compliance:

  • Employers with employees who are subject to the Canada Labour Code should confirm that any long-term disability plan they provide meets the new federal requirements.
  • Other employers with uninsured long-term disability plans for Ontario employees should investigate obtaining insurance for their plans.
  • Employers with uninsured long-term disability plans for employees elsewhere in Canada may wish to review their plans and disclosure to employees and monitor regulatory developments in the jurisdictions where they have employees.