17 March 2009 External T.I. 2008-0304591E5 - Flexible Health Care Spending Accounts

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 be affected if employees can select benefits after the plan year has commenced? Can a HCSA/PHSP allow a carry forward of unused credits and medical expenses?

Position: Yes unless one of the two specific exceptions described in paragraph 6 of IT-529 are met. Also, such a plan can only provide for the carry forward of unused credits or medical expenses, but not both.

Reasons: Such a plan must have some element of risk of loss. The requirements are clearly described in IT-339R2 and IT-529.

XXXXXXXXXX 							2008-030459
					
			Michael Cooke
March 17, 2009

Dear XXXXXXXXXX :

Re: Clarification of Rules for Flexible Health Care Spending Accounts

We are writing in response to your letter of December 16, 2008, wherein you requested clarification on some of the administrative guidelines concerning private health services plans ("PHSP") that may be provided through a health care spending account ("HCSA") in a flexible employee benefit program ("Flex Plan").

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. This Circular and other publications referred to in this letter are available on our website at http:///www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of our website.

A determination as to whether a particular HCSA will qualify as a PHSP can only be made on a case-by-case basis after reviewing all the relevant details of the particular plan. 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, specifically excludes benefits derived from the contributions of the taxpayer's employer to or under a PHSP.

A PHSP is defined in subsection 248(1) of the Act and the rules for such plans are discussed in more 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 subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

Some employers may provide medical expense coverage through a HCSA in a Flex Plan and it is possible for a HCSA to 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 are discussed in more detail in paragraphs 14 to 18 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

In terms of your specific concerns, paragraph 16 of IT-529 indicates that a carry forward of either unused credits or eligible medical expenses (but not both) for a period not exceeding 12 months, will not, in and of itself, disqualify a HCSA from being a PHSP. However, a plan will not be considered a PHSP if it allows participating employees:

1) who have no allocation to a particular component of the plan in the prior year to carry those expenses forward or back to another year; or

2) to allocate a nominal amount to a particular component of a plan in a year merely to allow the carry forward of excess expenses into another plan year.

Where an employee submits a claim for a reimbursement of eligible medical expenses that were incurred in a particular Flex Plan year within a predetermined fixed period of time (such as 30, 60 or 90 days) immediately following the end of that year, provided the amount claimed is not in excess of the employee's selected annual level of coverage for that particular year, generally, the reimbursement of such expenses would not, in and of itself, disqualify the HCSA from being a PHSP.

Finally, as described in IT-529, while a plan year does not have to be the calendar year and does not have to be the same for all employees, the employee's annual allocation of flex credits to the HCSA must ordinarily be irrevocably made on or before the beginning of the Flex Plan year. As such, once the employee's benefit selection has been made for a particular plan year it cannot be changed without affecting the income tax status of the plan (for instance, see paragraph 8 of IT-529). However, paragraph 6 of IT-529 describes two exceptions which could allow an employee to change his or her benefit selection during the plan year.

The first exception is where the employee experiences a "life event". A "life event" should be defined in the plan documentation but typically could include events such as the birth or death of a dependant, a change in marital status or the loss of insurance coverage under a spouse's employer's plan. The second exception is where there is a change in an employee's employment status which change has a bearing on his or her participation in the Flex Plan. A change in an employee's employment status could take place, for example, where his or her employment changes from full-time to part-time, or visa versa. As described in paragraph 6 of IT-529, if the amount of flex credits allocated to an employee is altered by reason of a change in employment status, the original selection of benefits to accommodate the increase or decrease in the amount of flex credits available may be changed; however, any such change cannot be made on a retroactive basis.

We trust our comments will be of assistance to you.

Yours truly,

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