15 November 2012 External T.I. 2012-0436061E5 - Is the self-administered HCSA a PHSP?

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: Does the proposed self-administered health care spending account qualify as a private health services plan in order that the premiums paid by the employer are not a taxable benefit to the employee?

Position: Question of fact, but likely yes.

Reasons: The HCSA appears to meet the criteria of a PHSP as outlined in IT-339R2.

XXXXXXXXXX 2012-043606
B. Ruttan-Morillo

November 15, 2012

Dear XXXXXXXXXX,

This is in response to your email dated February 2, 2012, enquiring about whether a proposed Health Care Spending Account (HCSA) would qualify as a private health services plan (PHSP). You have asked for confirmation of the tax implications of the proposed plan.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to provide 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 a PHSP.

Pursuant to the Act, a PHSP means a contract of insurance in respect of hospital expenses, medical expenses, or any combination of such expenses or a medical care insurance plan, a hospital care insurance plan, or any combination of such plans. In Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years], the CRA has set out the requirements that must be met in order for a plan to be considered a PHSP. Paragraph 3 of IT-339R2 specifies that a PHSP must be a plan in the nature of insurance. Therefore, it must represent an undertaking by one person, to indemnify another person, for an agreed consideration, from a loss or liability in respect of an event, the happening of which is uncertain.

As indicated in paragraph 7 of IT-339R2, an arrangement where an employer reimburses its employees for the cost of medical care or hospital care may be considered a PHSP where the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. However, paragraph 4 of the bulletin provides that coverage must be in respect of hospital care or expenses, or medical care or expenses, which normally would otherwise have qualified as medical expenses under the provisions of subsection 118.2(2) of the Act.

Employers may provide health coverage through a HCSA which is generally a plan 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 to the employee. HCSAs are discussed in detail in paragraphs 14 to 18 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

Paragraph 15 of IT-529 reiterates that there must be a reasonable element of risk in order for a HCSA to qualify as a plan of insurance. For example, where it is likely that the employee will use up the credits allocated to his or her HCSA, it will not be a plan of insurance. Paragraph 16 states “…a plan which permits the carry forward of either the unused allocation or medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a private health services plan solely by reason of the carry forward provision in the plan.” Paragraph 17 also states that if an employee is able to withdraw or transfer an amount from a HCSA, it will not be considered a PHSP.

The type of plan you have described appears to satisfy the conditions required for a PHSP. However, it is a question of fact in each case, and all pertinent documentation regarding the plan must be examined in detail in order to make a final determination.

We caution our comments are general only and may differ after a review of all the facts.

Yours truly,

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