24 January 2005 External T.I. 2004-0105181E5 - PHSP Within A Health Care Spending Account

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: Whether the non-taxable status of a PHSP provided through a HCSA will change where employees have certain rights in respect of the balance of credits in the HCSA?

Position: Question of fact.

Reasons: A HCSA that provides employees with inherent rights to the balance of credits in their account will not qualify as a PHSP. One of the criteria that a plan must meet to be considered a PHSP is that it be a plan of insurance, and a plan that provides employees with rights in respect of the balance of credits in the HCSA is not a plan of insurance. The only right that employees may have is to get reimbursed for eligible medical expenses under the terms of the plan. As well, when a HCSA provides for a carry forward of unused credits for a period not exceeding 12 months, this will not disqualify the plan as a PHSP solely because of the carry forward provision. Also, the status of a plan as a PHSP is unaffected as a result of the employer extending coverage to retired employees.

									2004-010518
XXXXXXXXXX 		Randy Hewlett, B.Comm.
(613) 941-7239
January 24, 2005

Dear XXXXXXXXXX:

Re: Private Health Services Plan Within A Health Care Spending Account

We are writing in response to your letter of November 25, 2004, wherein you inquired about the taxable status of a private health services plan ("PHSP") provided through a health care spending account ("HCSA"). We understand your main concern is the taxable status of the PHSP when employees have certain rights in respect of the balance of credits in the HCSA.

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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

Paragraph 6(1)(a) of the Income Tax Act (the "Act") includes in a taxpayer's income the "value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment." Subparagraph 6(1)(a)(i) of the Act, however, excludes benefits derived from the contributions of the taxpayer's employer to or under a PHSP. PHSP is defined in subsection 248(1) of the Act and discussed in detail in Interpretation Bulletin IT-339R2, Meaning of "Private Health Services Plan". As noted in paragraph 4 of IT-339R2, coverage under a PHSP must be in respect of medical expenses which normally would otherwise have qualified under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

Some employers may provide such health coverage through a HCSA. These plans are generally comprised of individual employee accounts that provide for a reimbursement of eligible medical and dental expenses. A HCSA may qualify as a PHSP provided it meets all the requirements of a PHSP. If a HCSA does not qualify as a PHSP, all benefits received out of the plan will be taxable pursuant to paragraph 6(1)(a) of the Act. The requirements that a HCSA must meet to be considered a PHSP and thus maintain its non-taxable status, are discussed in detail in paragraphs 14 to 18 of Interpretation Bulletin IT--529, Flexible Employee Benefit Programs.

In terms of your concerns, we note that the last sentence of paragraph 15 of IT-529 indicates that a HCSA that provides employees with inherent rights to the balance of credits in their account will not qualify as a PHSP. One of the criteria that a plan must meet to be considered a PHSP is that it be a plan of insurance. In our view, a plan that provides employees with rights in respect of the balance of credits in the HCSA is not a plan of insurance and therefore, is not a PHSP. In essence, the only right that employees may have is to get reimbursed for eligible medical expenses under the terms of the plan. We would note, however, that when a HCSA provides for a carry forward of unused credits for a period not exceeding 12 months, this will not disqualify the plan as a PHSP solely because of the carry forward provision.

Finally, it should also be noted that the status of a plan as a PHSP is unaffected as a result of the employer extending coverage to retired employees. Employer-paid premiums to a PHSP on behalf of retirees and the reimbursement of eligible expenses under the terms of the plan, are not taxable benefits for the retirees.

We trust our comments will be of assistance to you.

Yours truly,

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