11 June 2008 External T.I. 2007-0255251E5 - Two-Elections in 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 two elections in one year jeopardizes the status of a health care spending account in a private health services plan.

Position: No.

Reasons: The two elections are not offensive because the amounts are truly notional and it is not an ongoing situation.

2007-025525
XXXXXXXXXX Kathryn McCarthy CA
(613) 948-6106
June 11, 2008

Dear XXXXXXXXXX ,

Re: Two Elections in One Year in a Health Care Spending Account

This is in response to your letter of October 9, 2007, and further to subsequent telephone conversations (McCarthy/XXXXXXXXXX and McCarthy/XXXXXXXXXX ). We apologize for the delay in our response.

Your client provides its employees with a flex benefit program which includes a Health Care Spending Account ("HCSA") in a Private Health Services Plan ("PHSP"). The flex program has annual enrolment, which occurs in November, with HCSA elections effective for the following January 1st. Insofar as the HCSA credits are truly notional, there is no cash available to the employee. Your client is considering transferring the flex program, including the HCSA, to a new insurance carrier. You inquire as to whether two elections in one year would jeopardize the status of HCSA as a PHSP.

While your client seeks proposals from insurance carriers, the annual enrolment process for 2010 will be deferred to May 2010 with a July 1, 2010, effective date. For the first 6 months of 2010, the HCSA amount will be prorated based on half of the employee's 2009 HCSA flex credit allocation. If a new insurance carrier is in place, employees will then have the opportunity to modify their HCSA elections during the May 2010 enrolment process. The modified election will apply only to HCSA flex credits and will not apply to any other benefits available under the flex program. The date of the enrolment for 2011 has not yet been determined. If the fall enrolment pattern is continued, employees will make their HCSA elections in the fall of 2010 with a January 1, 2011 effective date.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra.gc.ca. Should the situation involve a specific taxpayer and transactions that have already been completed, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments, which may be of assistance.

In our opinion where two HCSA elections occur in circumstances such as you describe and the second election is made to allocate (or reduce) only notional flex credits to HCSA benefits in the plan offered by the new insurance carrier, the elections will generally not jeopardize the status of a HCSA that otherwise qualifies as a PHSP.

We trust the above comments are of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch