30 November 1995 Ruling 9632073 - XXXXXXXXXX-FLEXIBLE BENEFIT PLAN

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:

standard flex benefit plan. Only point for consideration was whether the employer could give additional flex dollars to any employee who opts to give up coverage under the wage loss replacement plan to which the employer ordinarily contributes. When the employee chooses to participate in a separate employee pay-all plan, the employer is no longer required to contribute to the "core" plan and hence "bonus" flex dollars are put in the Health Spending Account.

Position:

approved as the contribution by the employer to the wage loss replacement plan is not otherwise required to be included in income as it is exempted under 6(1)(a)(i), therefore, 56(2) does not apply

Reasons:

56(2), 6(1)(a)(i)

XXXXXXXXXX							963207
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear XXXXXXXXXX:

Re: Flexible Benefit Plan
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your XXXXXXXXXX, request for an advance income tax ruling for XXXXXXXXXX proposed Flexible Benefit Plan.

FACTS

1.XXXXXXXXXX is a corporation resident in Canada, incorporated in XXXXXXXXXX and continued by Articles of Continuance under the Canada Business Corporations Act.

2.XXXXXXXXXX files its federal income tax return at the XXXXXXXXXX Taxation Centre in XXXXXXXXXX.

3.XXXXXXXXXX is developing a "XXXXXXXXXX" flexible benefits plan (the "Plan") which it intends to offer to employees commencing XXXXXXXXXX. The Plan will provide employees with a basic level of benefit protection and an opportunity to tailor their employment benefits to meet their personal needs by choosing from a range of options. The Plan will also provide XXXXXXXXXX with an opportunity to control future employee benefits costs.

PROPOSED TRANSACTIONS

4.XXXXXXXXXX proposes to establish the Plan for "Eligible Employees" which will operate as follows:

a)"Eligible Employees" are full-time employees who work 37.5 hours per week and part-time employees who work an average of 20 hours per week and not less than 1,000 hours per calendar year. All Eligible Employees will be enrolled in the Plan upon completion of the coverage waiting period and with permanent part-time employees, completion of the minimum work hours requirement.

b) The following benefits will be provided to Eligible Employees as Core Coverage under the Plan:

(i) Accidental Death and Dismemberment
(ii) Salary Continuance
(iii) Short Term Disability
(iv) Life Insurance
(v) Long Term Disability
(vi) Health Care

Core Coverage will provide employees with a basic level of benefit protection in the areas listed above. Core Coverage will be mandatory for all Eligible Employees and will be fully paid for by XXXXXXXXXX.

c) XXXXXXXXXX will establish a Health Spending Account (the HSA) designed to meet unique employee needs by allowing a choice of benefits from a range of optional benefits (the "Options", see 5 below). Each employee's HSA will be credited monthly with an allowance of "Flex Dollars" by XXXXXXXXXX. Employees cannot contribute to this account. Flex Dollars are the difference between the cost to XXXXXXXXXX of providing its current benefit plan, using XXXXXXXXXX as the base year, and the cost to XXXXXXXXXX of providing Core Coverage (in the applicable year). The amount of Flex Dollars allocated to an Eligible Employee will depend on salary category.

Employees will be able to use Flex Dollars to acquire extended health and dental care coverage by being offered an enhanced Health Care Option and a new Dental Care Option. In addition to the extra coverage afforded by upgrading health coverage from the Core Coverage, Eligible Employees may choose to get reimbursed for "Eligible Medical Expenses" not covered by Core Coverage or the enhanced Health Care Option or new Dental Care Option. As well, they will be able to use their Flex Dollars to make contributions to their Group Registered Retirement Savings Plans.

"Eligible Medical Expenses" are those which otherwise qualify as a medical expense under section 118.2 of the Income Tax Act (Canada) ("the Act"). Eligible Medical Expenses may be incurred in respect of the employee, the employee's spouse and/or dependent children.

Flex Dollars will be used by XXXXXXXXXX in the following order:

(i) for chosen Health and Dental Care Options.

(ii) for Group RRSP contributions.

(iii) to permit the reimbursement of Eligible Medical Expenses.

d) Each benefit area in the Plan, except Accidental Death and Dismemberment, Salary Continuance and Short Term Disability, has at least two Options from which the employee may choose to use his or her Flex Dollars. There are no Options under the Plan which increase benefits beyond Core Coverage level for Accidental Death and Dismemberment, Salary Continuance and Short Term Disability.

e) The number of Flex Dollars required by each employee for an Option will vary depending on the employee's family status and salary level.

f)Employees will be able to choose to acquire some Options with Flex Dollars from their HSA only, through payroll deductions only, or a combination thereof.

g) XXXXXXXXXX will determine the amount of each employee's Flex Dollar allowance annually. This amount will be determined by reference to XXXXXXXXXX current (1997) benefit costs and is explained more fully in 4(c) above. The cost of each Option will also be determined.

h) Prior to January 1 of each year (the "Flexible Benefits Anniversary Date") or the date of the employee's benefits first take effect (the "Personal Anniversary Date"), each Eligible Employee may inform XXXXXXXXXX as to which Options the employee wishes to select for the coming Flex Year (January 1 - December 31 or the twelve-month period between Personal Anniversary Dates). In addition, the employee will indicate which Options are to be paid for through payroll deductions and which ones are to be provided using Flex Dollars.All employee selections will be locked-in for at least twelve months, except if:

?an employee elects to change the Personal Anniversary Date to the Flexible Benefits Anniversary Date, or

?an "Eligible Lifestyle Change" occurs. Eligible Lifestyle Changes are significant events that warrant a review of Option selections. Examples of Eligible Lifestyle Changes are marriage, divorce, separation, death, birth of a dependent or termination of a spouse's employment. Within 60 days of an "Eligible Lifestyle Change," employees may make changes to their benefits choices on a prospective basis to accommodate the "Eligible Lifestyle Change."

(i) During the Flex Year, employees will make insurance claims or apply for expense reimbursements according to the terms and provisions of the Options they have selected.

(j) At the end of each Flex Year, employees will be allowed to carry forward any unused Flex Dollars into the next Flex Year. Unused Flex Dollars carried forward into the next Flex Year must be used within that next twelve month period or they will be forfeited. Unused Flex Dollars carried forward into the next Flex Year can be used only for the reimbursement of Eligible Medical Expenses.

(k) Unused Flex Dollars will also be forfeited on the last day of employment. The employee will have 60 days after the date of termination of employment to submit claims or requests for reimbursement of Eligible Medical Expenses incurred prior to the termination date.

(l) Coverage for the Life Insurance and Long Term Disability Options will be provided through an insurance company. The Health Care, Dental Care and Reimbursement of Eligible Medical Expense Options will be administered through a non-insured Administrative Services Only ("ASO") arrangement with a major insurance company. An insurance feature will be attached to the Health Care Option which will limit XXXXXXXXXX financial liability to a maximum of $XXXXXXXXXX per year, per covered person.

(m) XXXXXXXXXX will fund the ASO arrangement with monthly payments similar to monthly insurance premiums. The contributions will be calculated by the carrier. The projected cost of the coverage for the Options will be based on XXXXXXXXXX historical experience of claims, with administrative expenses and premium taxes added to that cost.

5.The following is a brief description of the Options under the Plan.

(a) Life Insurance

Employees will be able to choose various levels of life insurance above the Core Coverage including increased personal, spousal and child life insurance coverage. The increased coverage will be provided through an insurance company and may be purchased with payroll deductions only. For Core Coverage protection only, the premium is fully paid by XXXXXXXXXX.

(b) Long-Term Disability ("LTD")

Currently, XXXXXXXXXX has a long term disability plan as part of its benefits package for Core Coverage (Core LTD Plan). This coverage is mandatory for all Eligible Employees, the premium is paid for by XXXXXXXXXX, and the benefits equal XXXXXXXXXX% of monthly salary. With the introduction of the proposed Plan, there will be two separate LTD plans - the Core LTD Plan under which the employer pays all applicable premiums and an employee-pay-all insurance plan as an Option under the Plan. Each plan will be funded by separate insurance policies. Employees will be able to choose to replace the Core Coverage LTD with an employee-pay-all plan which provides benefits of XXXXXXXXXX of net salary with or without inflation protection. All Coverage will be provided through an insurance company. If an employee chooses to participate in the employee-pay-all plan, XXXXXXXXXX will credit additional Flex Dollars to the employee's HSA equal to the premium on his or her Core LTD Plan because XXXXXXXXXX will no longer be paying any LTD premium on behalf of such employee. The entire premium for the new (and upgraded) LTD plan will be paid by the employee through payroll deductions. The additional Flex Dollars credited to the employee's HSA are to compensate the employee for the reduction in Core Coverage paid for by XXXXXXXXXX which will occur due to the selection of this Option.

(c) Health Care

Employees will be able to choose single, couple or family coverage for medical-related Eligible Medical Expenses not covered by the provincial health care plan. Employees will pay for the coverage with Flex Dollars and/or payroll deductions. The coverage will be provided through the ASO arrangement and the insurance element discussed in 4(l) and (m) above.

(d) Dental Care

Employees will be able to choose single, couple or family coverage for dental-related Eligible Medical Expenses. Employees will pay for the coverage with Flex Dollars and/or payroll deductions. Coverage will be provided through the ASO arrangement discussed at 4(l) and (m) above.

(e) Reimbursement of Eligible Medical Expenses

Employees will be able to use remaining Flex Dollars for the reimbursement of Eligible Medical Expenses that are not covered by the Health Care and Dental Care Options.

(g) Group RRSP

Employees will be able to use Flex Dollars to make Group RRSP contributions. The total annual allocation must be at least $XXXXXXXXXX. All amounts allocated to the Group RRSP by an employee will be taxed under paragraph 6(1)(a) of the Act.

Rulings Given:

Provided that the above-mentioned facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that any documentation governing the plan contains substantially the same provisions as that outlined in the Employee Booklets submitted on XXXXXXXXXX and that the transaction is carried out as described, we rule as follows:

1.The allocation of Flex Dollars by XXXXXXXXXX to an Eligible Employee, including additional Flex Dollar allocations to those employees who forego employer paid premiums under the Core Plan for LTD coverage in the manner set out in 5(b) above, will not, in and by itself, be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor a benefit received by the employee within the meaning of section 6 of the Act.

2.The Options described at 5(c), (d) and (e) above each qualify as a "private health services plan" as defined in subsection 248(1) of the Act.

3.Payments by XXXXXXXXXX to the administrator of the ASO arrangement described in 4(l) and (m) above in connection with the Options described at 5(c), (d) and (e) above made to employees by the administrator shall not be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor as a benefit received by the employee within the meaning of section 6 of the Act.

4.Outlays or expenses made by XXXXXXXXXX in connection with the Plan for the purpose of providing benefits to its employees and the spouses and dependent children of the employees, will be deductible in computing XXXXXXXXXX income in accordance with section 9 and subject to paragraph 18(1)(a), subsection 18(9) and section 67 of the Act.

5.Benefit payments received by employees from the LTD Plan described in 5(b) above, the premiums of which originate entirely from amounts withheld from the employees through payroll deductions ("employee pay all") shall not be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor as a benefit received by the employee within the meaning of section 6 of the Act.

Comments:

You have asked that we comment on whether XXXXXXXXXX may extend coverage under its private health services plans (5(c), (d) and (e)) to same-sex couples at some future time without jeopardizing the status of this advance income tax ruling. A plan that provides coverage for same-sex couples can meet the definition of a private health services plan so that XXXXXXXXXX may expand coverage to include this class of individuals without adversely affecting the Plan.

When life insurance coverage for an employee is provided under the same policy which includes spouse or dependant coverage, the valuation of the benefit from the life insurance coverage of the employee is determined under subsection 6(1) of the Act rather than subsection 6(4). The valuation of the benefit derived from life insurance coverage which is not a group term life insurance policy as defined in the Act (e.g. dependant coverage) is not prescribed by Regulation and thus is determined based on the value of such a benefit. The value of this benefit is ordinarily the amount of premium paid under the policy in respect of such coverage.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 30, 1990, and the Special Release attached thereto dated September 30, 1992, issued by the Department of National Revenue and are binding provided that the proposed Plan is implemented by XXXXXXXXXX.

Yours truly,

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch