7 May 2002 Internal T.I. 2002-0123617 - reallocation of flex credits

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 CCRA.

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

Principal Issues: Whether employee who makes a genuine error in her selection of benefits under a flex plan, can correct the error after the plan year has commenced

Position: Employee can correct error if it is a genuine error, and the employee has not merely changed her mind after the fact.

Reasons: If it is a genuine error, then the employee is not changing her benefit allocation from what she originally intended to choose. The CCRA has allowed the correction of genuine errors in other situations. See, for example, 2001-0100105.

		May 7, 2002

	London Tax Services Office	HEADQUARTERS
Mr. Rick Wozniewski	Wayne Antle, CGA
	Audit Division	(613) 957-2102

		2002-012361

Flexible Employee Benefit Plans

This is in response to your letter of February 12, 2002, concerning whether an employee can change the allocation of benefit coverage levels under a flexible benefit plan ("flex plan") after the start of the plan year, where the allocation was done in error.

You have summarized the facts as follows:

The employer offers its employees a flex plan whereby the employees can choose from various options including a health care spending account. The flex plan meets the requirements set out in Interpretation Bulletin IT-529 Flexible Employee Benefit Plans, and the health care spending account is a "private health services plan" as defined in subsection 248(1) of the Income Tax Act. Every October, employees must choose their levels of coverage for the various benefits that will be provided in the upcoming calendar year. The employees make their allocations by means of the employer's internal intranet. They can review and model the various benefits, and select their coverage levels using this intranet. When an employee finally selects the allocation of coverage levels and clicks on the "Save" button, the choice is irrevocable. In November, a confirmation letter is sent to each employee confirming the choices made. An employee has twenty-one days to notify the employer, and correct any errors in the allocation.

In this particular situation, a female employee incorrectly chose a higher level of coverage for her health care spending account than what she desired. She intended to select $150 per year, but selected $150 per pay period in error. She did not become aware of her mistake until January when she receiver her first pay cheque in the new year. She claims that she never received the November confirmation notice. Your question concerns whether she can correct this error without adverse tax results to either herself, or the flex plan.

Our Comments

According to paragraph 5 of Interpretation Bulletin IT-529, in order for an employer to be entitled to segregate the taxable and non-taxable benefits offered under the umbrella of a flex plan, employees are required to choose which benefits will be provided under the flex plan and how the benefits will be funded prior to the beginning of the plan year. In addition, the selection must be irrevocable unless, as noted in paragraph 6 of IT-529, employment circumstances change, or a life event occurs.

In our view, where an employee intends to select a certain level of coverage prior to the plan year, and, through a genuine error, selects a different coverage level by, for example, filling out a form incorrectly or selecting the wrong option on a computer screen, this error can be corrected without affecting the status of the plan, or having adverse tax consequences to the employee. However, it must be established, after reviewing all of the facts, that the original benefit selection made by the employee was not the allocation that he or she intended to make. In addition, the employee must have taken steps to correct the error as soon as he or she became aware, or should have become aware, of the mistake.

In this case, if it is established, after reviewing all of the facts, that the employee has made a genuine error in her selection of benefits, and has not merely changed her mind after the fact, it is our view that this error can be corrected without affecting the status of the flex plan.

We trust that our comments will be of assistance.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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