12 February 2004 External T.I. 2003-0051891E5 - Excess contrib. to a cost plus administrator

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.

Principal Issues: The income tax treatment of excess contributions in respect of a cost plus PHSP.

Position: The excess contributions can generally be returned to the employer without income tax consequence to the employee.

Reasons: Under a cost plus PHSP, the employer is responsible only for reimbursing the administrator for approved employee claims and an administration fee.

XXXXXXXXXX 2003-005189
J. Gibbons, CGA
February 12, 2004

Dear XXXXXXXXXX:

Your letter dated November 5, 2003, which was faxed to the Surrey Tax Services Office, was forwarded to us for reply. In your letter, you requested an opinion regarding the income tax treatment of unused funds being held by an administrator of a "private health services plan" ("PHSP") at the time that the contract with the administrator (the "Administrator") is terminated, and a contract with a new administrator is entered into. We also acknowledge receipt of the agreement (the "Agreement") between the taxpayer (the "Taxpayer") and the Administrator pursuant to which the latter was contracted to manage the PHSP on a cost plus basis for the Taxpayer and its employees (the "Employees").

In general terms, the Agreement provides that the Administrator is responsible for reviewing and approving Employees' claims for defined risks under the PHSP. In return, the Taxpayer pays the Administrator a fee of $XXXXXXXXXX per month (prorated for partial months) per employee plus XXXXXXXXXX% of the medical expenses reimbursed by the Administrator. The Taxpayer also indemnifies the Administrator for the reimbursement of valid medical expense claims. The Taxpayer remits advances to the Administrator every three months to cover administration fees and Employees' claims. However, if required, the Administrator may invoice the Taxpayer for further advances. As we understand it, the Agreement with the Administrator has been terminated, and excess advances from the Taxpayer are being held by the Administrator pending the Taxpayer's instructions.

You wish to know whether the excess contributions:

1. Can be transferred to RRSP's on behalf of Employees?

2. Can be transferred to a health spending account?

3. Can be used to offset the cost of extended health and dental premiums under a group insurance plan?

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. However, we have provided some general comments below, which we hope will be of some assistance to you.

Where an employer makes an overpayment to the administrator of a cost plus PHSP, these excess amounts can generally be returned to the employer without any income tax consequences to the employees, as long as the plan continues to qualify as a PHSP. Since, in the situation described above, the Taxpayer has entered into a contract with a new plan administrator that will continue to operate the PHSP on a cost plus basis, we would expect that the excess funds would likely be used to cover future claims under the plan. Where the excess funds are used to purchase PHSP benefits for the Employees, such payments would not constitute a taxable benefit to them because of the exemption found in subparagraph 6(1)(a)(i) of the Income Tax Act (the "Act").

If, on the other hand, the Taxpayer uses excess funds which have been refunded by the Administrator to purchase non-PHSP benefits for the Employees, these additional benefits may be taxable as employment benefits. In general, all employee benefits are taxable under paragraph 6(1)(a) of the Act unless they are exempt under a specific provision of the Act. Accordingly, where the refund of excess funds is contributed to a registered retirement savings plans ("RRSP") for an employee, such contribution would result in a taxable employment benefit. The employee may be entitled to an RRSP deduction for the amount contributed depending upon his or her RRSP deduction limit.

Our comments above are based on presumption that the particular plan qualifies as a PHSP pursuant to the definition of this term in subsection 248(1) of the Act, and that it operates on a cost plus basis. Both of these terms are described in detail in Interpretation Bulletin IT-339R2, Meaning of "private health services plan". Whether these assumptions hold true are questions of fact, and we would have to review in detail all of the facts, including the plan documentation, to make an actual determination.

If you have further questions concerning completed transactions, you should contact the Taxpayer's local tax services office. On the other hand, if the Taxpayer is contemplating specific proposed transactions, then we would suggest that consideration be given to requesting an advance income tax ruling in the manner described in Information Circular IC 70-6R5.

We trust that these comments will be of assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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