Employers and employees need to be ready for potential tax charges as a result of the new Optional Remuneration Arrangement (OPRA) rules, says Aon's Catherine Stait, and benefit redesign may be needed.
The tax advantages removed with the new OPRA rules impacts two of the mainstays of flexible benefit arrangements, group life assurance and group income protection, and will apply from 6 April 2018 at the latest as part of salary sacrifice changes in the Finance Act 2017.
Catherine, a principal at Aon Employee Benefits, also says that the way employers provide life cover to employees is also in the spotlight. She explains: "Cover on a 'registered' and 'excepted' basis is now treated differently for Benefit in Kind (BIK) purposes and given the rising popularity of excepted arrangements, there is significant additional complication for employers".
Polls from a number of Aon events discussing OPRA show that many employers (40%) are utilising the 'grandfathering' option in order to maintain the previous taxation position as a short-term approach by locking down flexible benefit choices until their next renewal. However, Aon's warning is this is a short-term method that can only be utilised until the next renewal date, or 5 April 2018 at the latest.
Aon advises employers to:
- Consider the many aspects OPRA impacts, particularly for life cover, as the implications of the changes are being underestimated until the mechanics are considered. Catherine explains that the majority of clients are realising their current designs or procedures need to be refined or even fundamentally changed. "Employers need to make well-informed decisions to avoid disgruntled employees, but equally we caution against the existing rationale for designs being automatically disregarded just because of potential BIK implications. In short, the benefit in kind tail shouldn't wag the flexible benefits dog."
- Look at long-term solutions. In many cases, employers have discovered that the complexity of the same benefit being treated differently for BIK purposes means their current benefit design is no longer feasible. It says employers are also reconsidering their past reasons for benefit design, such as how life cover is provided.
- Implement robust employee communications, particularly if employees are given the flexibility to choose the nature of cover, for example, life cover. With ever-increasing flexibility of choice and the proven need for financial wellbeing education, communication will be pivotal to successful employee engagement.
Aon urges employers to consider these issues without delay. You can also get more information by contacting firstname.lastname@example.org or downloading the Aon Client Briefing: Spring Budget March 2017.
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