LegalTax & AccountingFebruary 03, 2022

New Zealand Government proposes national income insurance scheme

The New Zealand Government has released a discussion document outlining proposals for a new national income insurance scheme to cover workers for loss of employment.

The rationale behind the scheme is to support workers who lose their job through no fault of their own – either due to disestablishment (redundancy) or due to health conditions or a disability. Although the scheme is designed to cover different circumstances, there are many similarities to the other well-known no-fault cover in New Zealand – accident compensation (ACC).

The scheme will be funded by a compulsory levy split equally between employers and workers. An initial levy of 2.77% (including GST) of salary/wages is proposed. Split equally, this results in a levy of 1.39% each for the employer and employee (the employee’s share of the levy will be deducted from their salary or wage). Much like ACC levies, the levy will be reviewed and adjusted over time.

The insurance scheme will pay 80% of a worker’s prior income for seven months after the loss of employment, the pre-job loss income being capped to a maximum of $130,911 (a similar cap on leviable income applies in respect of ACC earner levies). Practically, the amounts payable under the scheme can be demonstrated in the following table:

Annual income prior to job loss (before tax)  Approximate social insurance entitlements (before tax)
   Annually  Fortnightly  Weekly
$30,000 $24,000 $923  $462 
$50,000 $40,000 $1,538  $769 
$70,000 $56,000 $2,154  $1077 
$90,000 $72,000 $2,769  $1,385 
$100,000 $80,000   $3,077 $1,538 
$104,729  $4,028 $2,014 
$104,729 $4,028  $2,014 

(Source: Future of Work Tripartite Forum, “A New Zealand Income Insurance Scheme – A Discussion Document,” February 2022, at 76).

Notably, the first four weeks’ payout is to be funded by a “bridging payment” by the employer equal to 80% of the employee’s pay in the case of redundancy. This will be in addition to any redundancy compensation provided for in the employment contract. To this end, it is proposed that employers would need to give four weeks’ notice to the employee and the insurer before the redundancy is to take effect. A portion of the payout may be refunded to the employer if the employer helps the worker to find work within the initial period of unemployment.

The scheme will cover a broad selection of working arrangements. This includes part-time employees, some casual and fixed-term employees, seasonal workers, and self-employed people who most resemble employees. Feedback on this aspect is sought, especially on the issue of self-employed workers.

It is proposed that insurance payments to a worker under the scheme will constitute income for the purposes of Working for Families Tax Credits (WFFTC) and student loans. This means that any payout a person receives after the loss of employment may impact their eligibility and entitlement for WFFTC and student allowances. In addition, insurance payments may be subject to student loan repayment deductions.

Officials have not commented expressly on whether insurance payouts under the scheme will be subject to income tax. Still, if ACC weekly compensation is anything to go by, the payments may be subject to some form of withholding, such as pay-as-you-earn (PAYE).

The discussion document also seeks feedback on the interaction between payouts under the scheme and other Government payments that a person may receive, such as New Zealand superannuation, ACC weekly compensation, and paid parental leave. The preferred approach is to allow insurance payments to be made alongside superannuation payments. However, it is proposed that insurance payments should not be allowed at the same time as paid parental leave but could be made sequentially. As for ACC weekly compensation, a person could access both with some practical constraints that would mean that the person would not be better off financially than their pre-injury and displacement position.

There is a lot of detail to absorb in the discussion document. From an employer’s perspective, an important consideration will be increased costs in the form of the 1.39% levy as well as the required bridging payments for redundancy. Undoubtedly, compliance costs will also be involved with the requirement to comply with another levy regime.

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