16 December 1984 Income Tax Severed Letter A-0474 - [Employee Compensation & Benefit Plans]

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.

XXXX

R.J. MacDonald Tel/ (613) 995-0051

December 16, 1984

Dear Sirs:

Re: Employee Compensation & Benefit Plans

This letter is in reply to yours of September 20, 1984, in which you requested the Department's opinion concerning several issues in connection with a health care expense plan (the 'Plan') whereby the employer would reimburse those employees who are members of the Plan on account of certain medical expenses to the extent of the each employee's coverage under the Plan.

A typical Plan would operate as follows:

1. An employer (the 'Employer') would invite specific employees to join the Plan.

2. Those employees who decide to join the Plan (the Members) would elect, prior to the start of the Plan Year, the amount of coverage they wish to have for the coming Plan Year.

3. Each Member would pay a premium for the medical insurance to be provided in an amount equal to the coverage elected.

4. Payment of the premium would be accomplished by a reduction in the balance of the Member's flexible dollar account.

5. Throughout the Plan Year the Employer would reimburse the Members' insured outlays to the limit of each Member's coverage.

6. At the and of the Plan Year, the aggregate of each Member's claims in the past year will either be less than or equal to the insured coverage.

7. If the amount of the legitimate claims for all Members for the Plan Year is less than the premiums paid by the Members, the resultant surplus will be allocated to the Members using either the pro-rata or the proportional method described below.

8. With the pro-rata method, the Employer would allocate to each Member an amount equal to the total surplus divided by the number of Members.

9. Under the proportional method, the employer would allocate a certain percentage of the Year's surplus to each Member. The percentage is determined based on the amount of coverage selected by the Member prior the Plan Year in question relative to the total coverage selected by all Members prior to the start of the Plan Year.

10. The Plan surplus allocated to the Members becomes payable as of the end of the Plan Year in which the surplus arises. However, each Member may elect to have his/her portion of the Plan surplus applied towards the payment of the premium for the succeeding Plan Year.

You have asked us to confirm that a Member's allocation of flexible dollars to the Plan would be considered to be a payment by the Employer to a private health services plan and thereby be considered deductible in computing the Employer's taxable income.

We do not concur with your opinion in this matter. Actual payments subsequently made by the Employer to the Members pursuant to the Plan will be considered deductible as business expenses of the employer in accordance with section 9 of the Income Tax Act (the "Act").

You have asked us to confirm that the Plan qualifies as a private health services plan. In our opinion the Plan does not qualify as a private health services plan. In the Plan which you described in your letter of September 20, 1984, each Member's consideration is seen to be his/her undertaking to forgo a certain value of employee benefits and/or salary for the next Plan Year. Paragraph 5 of interpretation bulletin 339R indicates that the agreed consideration should relate closely to the coverage provided, being based on some method of computation involving actuarial or similar studies. The Plan is not one plan covering all participating Members since the coverage afforded each Member is set by such Member prior to the start of each Plan Year. Hence, each relationship between the Employer and a Member constitutes a separate legal arrangement. In our opinion, the Member's consideration cannot be said to be based on a computation involving actuarial or similar studies with the result that neither the Plan nor any of the individual agreements contemplated therein qualify as a private health services plan.

In the situation where the agreed consideration is regarded as being the employee's covenant as found in the contract of service executed between the employer and the employee, it is our opinion that the arrangement should cover all employees or all employees within a specific employee category in one plan with the same coverage provided for each employee. No charge would be levied on the employee for coverage in this situation.

In summation, it is our opinion that an arrangement which provides an elective amount of coverage determined annually by each employee and paid from "flex" credits would not qualify as a private health services plan funded from the Employer's contributions and excluded from the employee's income by reason of paragraph 6(1)(a) of the Act.

Yours truly,

for Director

Non-Corporate Rulings Division Legislation Branch RM/zg