A short guide to OpRA rules for Group Income Protection03.01.23
How have the OpRA rules for Group Income Protection changed and what does this mean for both the employer and employee? Lee Gruskin, Principal Health and Risk Consultant at Benefex explains and shares three actions to take in this short guide.
Principal Health and Risk Consultant, Benefex
What is Group Income Protection?
Group Income Protection is a popular, long established, insurance-based employee benefit designed to pay a proportion of an employee’s income if they’re unable to work long term due to illness or injury. The benefit remains popular as many of the insurance policies now come with free added value services which, when communicated correctly to employers and employees, can increase employee engagement and improve employee health and wellbeing as part of an overall corporate health and wellbeing strategy. In our recent REBA feature, we explored how to use income protection cover to support early intervention.
Unlike other group risk insurances such as Life Assurance and Critical Illness cover, Income Protection pays a regular income through payroll in line with the policy terms. Compared to these two other benefits, Group Income Protection premiums are more expensive as claims are long-term rather than one offs, but employer premiums can be offset as a business expense and therefore are tax efficient for the employer (although they are still subject to Employer National Insurance).
As costs can be prohibitive (with premiums rising over the last 30 years as long-term health conditions like mental illness and cancer became more common), many employers have chosen to pass on some of the cost of Group Income Protection by reducing the level of employer funded cover and inviting employees to ‘top up’ at their own expense, often via a salary sacrifice type arrangement.
This reduces the premiums paid for by the employer, who could then potentially use the savings they have made to extend the cover to a wider range of employees. This strategy will unlock all the added value benefits that are on offer under Group Income Protection to a much wider audience, ultimately benefiting both employer and employee. Flexing Group Income Protection benefits also gives employees the freedom to choose how much cover they need in line with their lifestyle and stage of life.
As with any flexible benefit offering, there are rules to follow regarding the taxation of premiums. There is also the additional consideration that Group Income Protection, when paid to eligible claimants, is subject to all normal deductions through the PAYE system.
When Optional Remuneration Arrangements (“OpRA”) guidance was introduced on 6 April 2017 by HMRC, it was designed to close off what was seen by HMRC as the ability for employees to flex many benefits through salary sacrifice arrangements, taking advantage of the favourable tax outcome by doing so. The government at the time recognised that a few benefits where salary was sacrificed such as pension benefits and cycle to work schemes were worthwhile benefits for which salary sacrifice should remain. It was thought at the time that Group Income Protection would continue to benefit from the full savings of salary sacrifice, supporting employees not in work due to illness and injury, and topping up any benefits an individual can claim from the Department of Work and Pensions.
Despite much opposition from employers, employees, insurers, and other stakeholders, HMRC ruled that Group Income Protection benefits paid for through salary sacrifice would be subject to income tax being payable by the employee on the premiums (as well as the Employer having to Pay National Insurance on the sacrifice element of the salary).
This was contested for two main reasons: Firstly, it was seen as short-sighted that a benefit which shifted the cost of workplace absence from the public to private sector would become less attractive for the private sector to offer. Secondly, it would mean that any employee who sacrificed salary to purchase flexible group income Protection benefits would be taxed twice - initially on the premiums and then again on the income received when an eligible claim was paid through payroll.
It was argued this double whammy was not the intention of the OpRA arrangements. Bowing to pressure, on 15 October 2019, HMRC advised the Association of British Insurers (ABI) that the taxation of the premium as a benefit in kind on flex Group Income Protection was to remain but taxation on the benefit itself would be discontinued.
Yet on 1 December 2022, HMRC reneged on its previous advice to the ABI and clarified that the guidance it gave to the ABI was in fact wrong. This means that there is once again a double whammy on the provision of flexible Group Income Protection benefits when the employee becomes a claimant.
What does this mean for employers and employees?
HMRC have put in place some transitional arrangements and are not seeking to reclaim the tax which was not paid during the period 15 October 2019 to 31 December 2023, following the information provided to the ABI. Effectively they are giving employers a year to get their houses in order.
If employers made the decision to offer flexible group income protection benefits based on the guidance HMRC gave the ABI, then employers will be permitted to continue to pay any claimants free of income tax on any flex element of benefit bought through sacrificing salary – as long as the employer can prove that the decision to provide benefits in this way was off the back of the guidance. How an employer does that may well be complex and is one for legal and tax specialists.
Any employee who sacrificed salary to purchase additional Group Income Protection benefits who goes off sick after 15 October 2019 and becomes a claimant before 31 December 2023 will not have to pay income tax on the flex element up to 31 December 2023.
Any flexible Group Income Protection claims in payment after 1 January 2024 will be subject to the original OpRA rules.
What should Employers do?
- Review GIP cover
All employers should review any GIP cover they provide under OpRA rules and understand what current and future claims (up to 1 January 2024) will be made free of taxation and which will not. Benefex, as the market leading digital employee benefits adviser and software provider can help employers outline the tax implications of flexing Group Income Protection to employees whilst ensuring any employee benefit software and platform is correctly configured to make sure payroll reporting is correctly set up to collect taxes on claims occurring since 6 April 2017.
- Consider the messaging you share with employees
Continuing to communicate the benefits and complex tax position of Group Income Protection in a simple manner, in line with your communications strategy for employee benefits, remains important. Communications will need updating to reflect the latest OpRA arrangements.
- Review new and existing Group Income Protection benefits
Our specialist team of Benefit Consultants can also help you decide the correct design of Group Income Protection benefits, whilst ensuring the provision of such benefits remains a central part of your employee health and wellbeing programmes.
We advocate the review of any existing Group Income Protection insurance premiums by conducting market reviews of the insurance terms available. Our leading team of Corporate Benefit Brokers use both whole of market and specially arranged deals under our Marketplace arrangements to source the most competitive and comprehensive insurance terms to reduce the cost of benefits.
Get in touch
This is a complex topic which may be a minefield to navigate but Benefex is here to help you source, offer, present and communicate your employee benefits and stay on top of the latest trends and topics in benefit provision.
Please speak to your normal Benefex Broker, Consulting Team or Customer Director for further information as to how Group Income Protection benefits can continue to be an important protection benefit for your employees. You can also contact us here if you’d like to speak with one of our experts.