Employer-funded healthcare trusts are an established, tax-efficient way to deliver the benefit of medical treatment to employees without having to buy employer-paid health insurance.
Traditional insurance involves paying an insurance firm a premium, including 12% in tax, that reflects the insurer’s prediction that claims will be made by employees, as well as its need to make profits and meet its own operating costs. Where fewer claims are made by employees and the cost to the insurer is less than predicted, the insurer gets to keep the profit and still charges another premium the next year.
Alternatively, a corporate healthcare trust is sponsored directly by the employer, with the employer meeting the cost of claims through its contributions to a trust fund. The employer cannot reclaim the funds that are paid to the trust, but those funds remain trust assets that can be used to pay running costs and any future benefits if not needed in the current year. To protect against the risk of an unexpectedly high level of claims in any period, the employer could still obtain excess or stop-loss insurance cover on that amount, for peace of mind.
The range of medical treatment that the trust provides is typically similar to that offered under an insured arrangement, but it can be more bespoke to better suit the needs and expectations of the workforce while still containing costs. Without an insurer to pay, the employer can also reapply the various running cost savings that it enjoys to enhance the trust’s benefits or improve other employee benefits.
The trust needs an administrator to arrange the provision of treatment benefits. There are several third-party providers which can provide that service. A fee will be charged for that service, but it is likely to be more cost-effective to appoint an administrator than attempt to perform the role in-house.
There are some legal and practical steps to take, and conditions to meet, if an employer-funded trust is to be used. Once established, the trust’s governance is overseen by the employer and the trustees. Importantly, if a bespoke trust is used, it will remain the employer’s, giving it the freedom to create a bespoke medical plan for its employees, and move between providers and administrators, without being tied to a particular insurer.
Kevin Gude is a pensions and incentives partner at Keystone Law
