7 June 2012 External T.I. 2011-0417671E5 - Balance in a health 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: Is an individual entitled to a refund of the balance in a health spending account when the plan is cancelled?

Position: The employee should have no right to any balance in the account for the HSA to qualify as a private health services plan.

Reasons: If the HSA is to qualify as a PHSP, it must be one of insurance with an element of risk. An HSA that provides for a refund of unused credits would not be considered to have the required element of risk.

XXXXXXXXXX
														2011-041767
														B. Ruttan-Morillo
June 7, 2012

Dear Mr. XXXXXXXXXX,

Re: Balance in a health spending account

We are writing in response to your email dated August 18, 2011, in which you requested confirmation on whether or not you are entitled to a refund of the balance in your XXXXXXXXXX Health Spending Account (HSA).

The terms of the HSA will determine whether you are entitled to a refund, not the Income Tax Act (Act). However, since your HSA appears to be part of a private health services plan (PHSP), we are providing the following general comments regarding this type of plan.

Contributions made to a PHSP by an employer on behalf of its employees are not included in the employees’ income as per paragraph 6(1)(a)(i) of the Act. Also, any contributions made by employees themselves to a PHSP qualify as a medical expense for purposes of the medical expense tax credit. Benefits received out of a PHSP are not taxable.

In order for a particular plan or arrangement to qualify as a PHSP, it must involve a reasonable element of risk that is assumed by the insurer, whether that insurer is the employer or a third party. Paragraph 3 of IT-339R2, Meaning of private health services plan, outlines the basic elements that a plan must contain in order to be a plan of insurance. As noted in paragraphs 15 to 17 of IT-529, Flexible Employee Benefit Programs, a plan that allows employees to withdraw or transfer the balance of unused credits in their HSA (other than as a premium payable in respect of another PHSP) is not a plan of insurance and therefore, would not be a PHSP. In essence, the only right that employees belonging to a PHSP should have is the right to be reimbursed for eligible medical expenses under the terms of the plan.

We trust these comments will be of assistance.

Yours truly,

Nerill Thomas-Wilkinson
Manager
for Director
Reorganizations
Income Tax Rulings Directorate