7 May 2002 External T.I. 2002-0127485 - COST PLUS HEALTH 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.

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:

PHSP for self-employed person and his immediate family (Cost-plus plans)

Position:

Lacks necessary element of insurance

Reasons:

Prior letters 1999-0014245,9904155,

2002-012748
CALU
Question # 3

COST PLUS HEALTH PLANS AND PARNERSHIPS/PROPRIETORSHIPS

Over the past several years, CCRA has issued a number of interpretation letters issued dealing with private health services plans (PHSP's) and cost plus plans. Many of these have dealt with proprietorships where a cost plus plan was established for the proprietor and perhaps his/her spouse or other employees.

It appears that the main issue, which must be addressed in determining whether a cost plus plan is in fact a plan of insurance, is whether one person has undertaken to indemnify another person for loss. Even though a proprietor may enter into a contract with an administrator to pay medical and hospital expenses, that is not in itself sufficient to make the plan a private health services plan. However, consider a situation where the individual's spouse (or children) are actively involved in the business and receive insurance protection by way of a cost plus PHSP by virtue of their employment and not by virtue of being related to the proprietor.

Questions:

a) Can the CCRA provide some definitive guidance with respect to when a cost plus plan established by a proprietorship or partnership would be considered a plan of insurance?

b) Would the CCRA update IT-339R2, which deals with the meaning of "private health services plan", which was last updated in August 1989, in order to provide more guidance on these requirements?

Answer:

In our view, where the individual's spouse and children are covered under a cost plus plan that plan would be the same as if the proprietor would subscribe to a cost plus plan with an administrator on his own behalf. The same people are being covered under this arrangement; the proprietor, his or her spouse and children are all individuals who are members of the same household. The same invoices would be submitted to the administrator and the proprietor would be seeking a business deduction for the same amounts whether the individual, the spouse or their children submit the claims. Accordingly, in our view, this arrangement would not qualify as a PHSP.

As stated in technical interpretation letter #9904155, dated April 28, 1999, it continues to be our view that a plan which consists of a contract between a proprietor and an administrator, under which the administrator agrees to reimburse the proprietor, his or her spouse and members of his or her household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP since it does not contain the necessary elements of insurance. In this situation, no person has undertaken to indemnify another person. Rather, the proprietor has assumed all of the risk for the personal hospital and medical bills. In our view, even though a proprietor enters into a contract with an administrator to pay medical and hospital expenses, this is not sufficient to conclude that the plan is a PHSP.

However, some concerns have been raised on the subject matter relating to cost plus plans and self-employed individuals. An internal review of our current position is under way and once this review is completed, a revision to IT-339R2 may follow.