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 EI premium reductions passed to employees ("savings") under an HRDC program could be incorporated into a flex plan
Position: Question of fact.
Reasons: It is necessary to review all of the facts in order to determine whether flex plan meets the requirements set out in IT-529.
XXXXXXXXXX Wayne Antle, CGA
2003-000045
May 21, 2003
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Flexible employee benefit programs
This is further to your letter of January 24, 2003, concerning the use of Employment Insurance (EI) premium reductions to purchase additional flex credits in an employee's flexible benefit plan ("flex plan").
You have summarized the facts as follows:
When an employer provides a short-term disability insurance plan for its employees that meets certain conditions, the employer can apply for a reduction of EI premiums. If a reduction of premiums is approved, 5/12 of the reduction (the "savings") must be given to the employees. The savings can be used to give the employees a cash rebate, new employment benefits, or increased employment benefits. You have asked us to consider the following questions concerning the use of the savings to fund benefits under a flex plan:
1. Can the savings be used to purchase additional flex credits to be used in the employee's health care spending account ("HCSA")?
2. Can the employee have the option of either receiving a taxable cash rebate, or using the savings to purchase additional credits in an HCSA, which would not be taxable?
3. If an employee can deposit the savings in an HCSA, does this have to be done prior to the beginning of the plan year?
4. Can the employee allocate the savings to an HCSA prior to the plan year, with the savings not being deposited to the HCSA until sometime during the year?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Interpretation Bulletin IT-529 Flexible Employee Benefit Plans sets out the administrative guidelines covering flex plans. According to paragraph 5 of 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, it is possible to incorporate the savings into a flex plan within the guidelines outlined in IT-529. However, with respect to the questions raised above, we cannot provide definitive comments without reviewing all of the facts and documentation including the structure of the flex plan, the existing employment contracts, and the written agreement to be provided to Human Resources Development Canada covering the method by which the savings will be passed to the employees. If you are considering amending your existing flex plan, or setting up a new plan, which will incorporate the savings, we would be pleased to examine the proposed transactions in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5.
We trust that our comments will be of assistance.
Yours truly
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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