27 March 2003 External T.I. 2002-0177775 - private services health 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 CCRA.

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

Principal Issues: Will a health services plan that provides for a redistribution of health credits qualify as a PHSP?

Position: Possibly, depends on the nature of the plan

Reasons: A PHSP must be a plan of insurance

XXXXXXXXXX 2002-017777
Lena Holloway, CA
March 27, 2003

Dear XXXXXXXXXX:

Re: Private Health Services Plan

We are writing in reply to your letter of December 2, 2002, wherein you requested our comments as to whether a particular health plan would be considered a private health services plan ("PHSP") under the Income Tax Act (the "Act").

Your letter sets out a hypothetical scenario whereby a health care spending account ("HCSA") allocates an annual limit to each employee and provides that the employee may carry unused credits forward for 12 months. If the credits are not used in the carryforward period, they are forfeited and allocated equally among all the participants of the HCSA at the commencement of the next year. For purposes of your enquiry we have assumed that where an individual's employment is terminated, that employee's credits are not reallocated.

Our Comments

Whether or not an arrangement qualifies as a PHSP can only be confirmed by way of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. We are, however, prepared to provide you with the following general comments.

One criteria for a HCSA to be considered a PHSP is that it must be a contract of insurance. In order for the HCSA to qualify as a plan of insurance it must contain the following elements:

(a) an undertaking by one person (in this case, the employer),

(b) to indemnify another person (in this case, the employee),

(c) for an agreed consideration,

(d) from a loss or liability in respect of an event,

(e) the happening of which is uncertain.

In your letter, you referred to the comments in paragraph 16 of IT-529, which relate to a HCSA provided under the umbrella of a flexible employee benefit program ("flex program"). Ordinarily, in such programs, an employee has the option of choosing between HCSA credits and salary or other taxable benefits. Our position is that a plan which permits the carry forward of either the unused HSCA credits or eligible medical expenses (but not both) for more than 12 months may not qualify as a PHSP since the carry-forward provisions would result in little or no risk that the employee would not use up his or her HCSA credits. In such cases, the HCSA acts like a personal savings plan into which an employee contributes (i.e., by way of foregone salary or benefits) for purpose of paying his or her own medical expenses.

In your letter you did not indicate whether the hypothetical HSCA would be provided under a flex program. Our concern here is to ensure that the employees will not be required to forgo salary or other benefits in return for coverage under the plan. If this is not the case, we believe that the HCSA described by you would contain the basic elements of insurance. However, we would need to be fully apprised of all the facts and examine the pertinent documents before we can provide you with a more definitive answer.

We trust the above comments are of assistance.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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