19 November 1996 External T.I. 9630175 - HEALTH SPENDING ACCOUNT C/F LIMITS

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:

reason for year end forfeiture of balance in a health spending account & ATR-23 in particular

Position:

A health spending account may have limited carryforward capability but a c/f in excess of 12 months would not contain sufficient risk to be a plan of insurance

Reasons:

a health spending account that is not a plan of insurance is not a phsp

A. Humenuk
XXXXXXXXXX							963017

November 19, 1996

Dear Sir:

Re: Private Health Services Plan

We are replying to your letter of September 11, 1996 in which you ask for clarification as to why the unused amount in an employee's health spending account as described in ATR-23, "Private Health Services Plan," dated July 14, 1987, must be forfeited.

The ATR series of publications reflect the principal aspects of actual advance income tax rulings that Revenue Canada has given in respect of a particular plan or series of transactions. As such, the facts set out in a particular ATR publication reflect the actual facts of a particular situation which was the subject of the ruling. While it may be possible to obtain the same tax consequences under a different plan or arrangement, the ruling was published for general information to show the tax consequences applicable to that particular arrangement at that time.

The terms and conditions of a particular employer-provided benefit plan are established by the employment contract and not by Revenue Canada. As a result, we can only comment on the income tax consequences resulting from the provision of such benefits, which may vary, depending on the terms of a particular plan. While we do not have sufficient details of your employer's plan to provide you with an analysis of the tax consequences pertaining to that particular plan, the following comments may assist in clarifying the income tax issues involved.

Except for certain listed exceptions, an employee is generally required to include in income the value of all benefits received by reason of his or her employment. One of the listed exceptions is the benefit derived from an employer's contribution to a "private health services plan" (PHSP), as that term is defined in the Income Tax Act.

The term "health spending account," and variations thereof, are used to describe a particular type of arrangement between an employer and its employees to provide employees with additional health care insurance. If a health spending account does not qualify as a PHSP, the amounts paid to employees as a reimbursement of medical or dental expenses will be included in their income as employment income.

As stated in paragraph 7 of the enclosed Interpretation Bulletin IT-339R2, an arrangement where an employer is obligated to reimburse its employees for medical or hospital expenses may come within the definition of a PHSP where the employer is obligated by the employment contract to pay such expenses. However, in order for a plan or arrangement to qualify as a PHSP, it must be a plan of insurance and thus involve a reasonable element of risk which is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP. The amount allocated for the employee's eventual use is merely an additional salary allocation and is taxable at the time that it vests with the employee.

While a carry forward period undoubtedly reduces the risk element in a health spending account, it is our view that a plan which permits the carry forward of either the unused allocation or eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely by reason of the carry forward provision in the plan.

It should be noted that Revenue Canada does not impose a limit on how much an employer can allocate to each employee in a particular year. However, most health spending accounts are used to supplement an employer's regular medical and dental plan and are thus not expected to fully fund the employees' medical and dental expenses.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosure