26 May 1994 External T.I. 9409635 - CASHING OUT A HEALTH CARE SPENDING ACCOUNT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

whether a health care spending account with a cash out provision can be a PHSP

Position TAKEN:

no

Reasons FOR POSITION TAKEN:

if it has a cash out position, it is not a plan of insurance

A. Humenuk

XXXXXXXXXX		940963

Attention: XXXXXXXXXX

May 26, 1994

Dear Sirs:

Re: Health Care Spending Accounts

We are replying to your letter of April 18, 1994 concerning health care spending accounts.

You ask whether or not the balances in a health care spending account can be paid to an employee in cash upon the termination of the individual's employment.

A health care spending account is not a term defined in the Income Tax Act (the Act) and as such, a health care spending account can be set up in any manner so desired by the employer. However, in order for a health care spending account to be considered a "private health services plan" as defined in subsection 248(1) of the Act, the plan must, among other things, be a plan of insurance.

As stated in paragraph 3 of Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"", a plan of insurance must contain the following basic elements of insurance:

a)an undertaking by one person,

b)to indemnify another person,

c)for agreed consideration,

d)from the loss or liability in respect of an event,

e)the happening of which is uncertain.

A plan which provides for the payment to the employee of the unused balances upon termination of employment does not contain the necessary elements in order to be considered a plan of insurance since the undertaking by the employer is to pay a specified amount of cash to the employee over a period of time irrespective of whether the employee incurs medical expenses of that amount.

Consequently such a plan would not be a "private health services plan" as defined in the Act and the employee would be required to include in income any reimbursements received out of such a plan under paragraph 6(1)(a) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch