Healthcare Trusts - an alternative to private medical insurance

​From 01 June 2017, Insurance Premium Tax (IPT) is due to increase to 12%, which is a 100% increase since October 2015.

The issue in brief

  • From 01 June 2017, Insurance Premium Tax (IPT) is due to increase to 12%, which is a 100% increase since October 2015. 
  • The costs for employers in providing healthcare benefits to employees through private medical insurance have increased substantially as a result of the increases in IPT. 
  • Our UK pensions and incentives team can assist employers implement healthcare trust arrangements which could provide the same healthcare benefits as private medical insurance but without the 12% IPT charge.

IPT

IPT is a tax on general insurance premiums, which was first introduced in 1994 as a standard 2.5% on most insurance policies. Although IPT was meant as a tax on the insurance provider, the cost has been passed on by the insurance provider to the consumer in the form of increased premiums. The forthcoming increase in IPT from 10% to 12% with effect from 01 June 2017 will mean that employers renewing private medical insurance policies for employees will pay higher premiums. With, for example, a £1 million insurance premium attracting a £120,000 IPT charge, it is worthwhile considering alternatives which can provide the same benefits at a significantly reduced cost.

Healthcare trusts

A recognised alternative to the conventional private medical insurance policy is a healthcare trust. The healthcare trust operates in an almost identical manner to an insurance policy such that employees receive the same benefits as under a private medical insurance policy except that, with a healthcare trust, an employer can set the benefit rules, have a higher level of control on costs and make significant savings by cutting out the IPT charge.

Broadly, under the healthcare trust arrangement the employer pays cash, usually an amount equal to the cost of an insurance premium, to a trust which has employees as beneficiaries. The trust then pays for employees’ medical treatment as and when claims are made. Typically a third party, usually one of the major healthcare insurance providers, is paid to administer the trust and deal with the operational issues such as claims handling and processing in much the same way as under an insurance policy.

As the healthcare trust structure does not involve an insurance contract, there is no IPT charge which saves the employer a significant amount of money. Further, if claims are lower than anticipated in any given year, the employer saves money as the excess in the trust is rolled into medical cover for the following year rather than an insurer taking extra profit.

To protect against the risk of claims being higher than expected, the employer can take out a stop-loss insurance policy to cover any claims in excess of the cash contributed into the healthcare trust. As the premiums for such policies are invariably significantly less than the cost of the full private medical insurance policy, the IPT charge on the stop-loss insurance premium would be minimal.

Next steps

Our UK pensions and incentives team are available to discuss the healthcare trust arrangements in further detail with you. The team, which has implemented these arrangements for numerous clients, have the expertise to deal with the legal and tax aspects of implementing healthcare trust arrangements and operational issues and can draft the necessary legal documents to ensure there are no regulatory issues or adverse tax charges triggered by the arrangements. 

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.