24 January 2019 External T.I. 2016-0651291E5 - Revised PHSP position - Self-insured plan

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: How does the revised PHSP position apply when determining whether a self-insured plan qualifies as a PHSP?

Position: Whether “all or substantially all” condition is satisfied is determined by looking at all the benefits paid out of the plan during the calendar year.

Reasons: This option provides consistency between insured and self-insured plans and with Revenu Québec’s administration of similar plans.

XXXXXXXXXX							2016-065129
P. Waugh
January 24, 2019

Dear XXXXXXXXXX:

Re: Private health services plans

We are writing in response to your email dated March 14, 2016, and our conversations of July 19, 2016 and September 1, 2016 (Waugh/XXXXXXXXXX), concerning clarification of the revised position on private health services plans (PHSPs). Thank you for your understanding regarding the delay of this response.

Under the Canada Revenue Agency’s (CRA) revised PHSP position, a plan qualifies as a PHSP where:

i. all of the expenses covered under the plan are medical or hospital expenses (medical expenses), or expenses incurred in connection with and within a reasonable time period following a medical expense (connected expenses);

ii. all or substantially all of the premiums paid under the plan relate to medical expenses that are eligible for the medical expense tax credit (METC); and

iii. the plan meets all other conditions as outlined in paragraph 3 of Interpretation Bulletin IT-339R2, Meaning of private health services plan [1988 and subsequent taxation years].

In regard to the revised PHSP position, you have asked the following three questions:

1. For insured plans, what are the tax consequences if not all or substantially all of the actual amounts paid under the plan are for medical expenses that are eligible for the METC?

2. For self-insured plans, how is the revised PHSP position applied? and

3. Would the application of the revised PHSP position to a self-insured plan differ where the plan consists of one or more health care spending accounts (HCSA) which set a ceiling on the amounts that can be claimed under the plan?

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

1. For insured plans, what are the tax consequences if not all or substantially all of the actual amounts paid under the plan are for medical expenses that are eligible for the METC?

An insured plan (employer pays premiums under a contract of insurance) will generally be considered to be a PHSP if all of the expenses covered under the plan are medical expenses or connected expenses, and “all or substantially all” (generally 90% or more) of the premiums paid under the plan relate to medical expenses that are eligible for the METC. The actual benefits paid to employees in the year are not considered in determining whether the “all or substantially all" condition has been satisfied.

For example, an insurance plan offers only 4 types of expense coverage as follows:

Type of medical		METC-		Percentage of	Benefit claims paid
expense			eligible	premium that
						relates to the
						medical expense

Prescription drugs	Yes			70%			70%
Dental			Yes			10%			10%
Hospital			Yes			12%			8%
Medical expenses		No			8%			12%
That are not
METC-eligible

In this example, only 88% of benefits paid for the year are for medical expenses that are METC-eligible. However, 92% of the premiums paid under the plan relate to coverage for medical expenses that are METC-eligible and 8% relate to non-METC medical expenses. Therefore, the plan would be a PHSP since 92% (i.e., at least 90%) of the premiums paid under the plan relate to coverage for medical expenses that are METC-eligible and the remaining 8% of the premium paid relates to coverage for other medical expenses.

2. For self-insured plans, how is the revised PHSP position applied?

When an employer provides benefits through a self-insured plan (i.e., the plan is not backed by a contract of insurance), the plan will satisfy the “all or substantially all” condition for a particular calendar year if all or substantially all of the benefits paid to all employees in the calendar year are for METC-eligible expenses.

For example, assume the following benefits are paid to employees in a calendar year.

		Prescription	Dental	Hospital	Medical	Total
		drug			expenses	expenses	expenses
		expenses						that are
		(METC-		(METC-	(METC-	not METC-
		eligible)		eligible)	eligible	eligible

Kim		$3,000		$1,000	Nil		$ 500		$ 4,500
Mohammed	$2,000		$1,500	$800		NIL		$ 4,300
Simon		$4,000		$  500	NIL		$ 500		$ 5,000

Total		$9,000		$3,000	$800		$1,000	$13,800

In this example, since 93% (($9,000 + $3,000 + $800) / $13,800) of all benefits paid to all employees in the calendar year are for expenses that are METC-eligible and the remainder of the benefits paid are for other medical expenses that are not METC-eligible, the plan would qualify as a PHSP for that calendar year (assuming all other conditions for PHSP qualification are satisfied.)

3. Would the application of the revised PHSP position to a self-insured plan differ where the plan consists of one or more HCSAs which set a ceiling on the amounts that can be claimed under the plan?

Where an employer provides benefits through a self-insured plan that consists of one or more HCSAs, the method of determining whether the plan satisfies the “all or substantially all” condition for a particular calendar year is no different than the method described above for self-insured plans. That is, the plan will satisfy the condition for a particular calendar year if all or substantially all of the benefits paid in the calendar year are for METC-eligible expenses. For clarification, the employees’ allocation of the ceiling amount to the various expense categories is not considered.

Most employers that offer HCSAs do so under one group plan but in rare circumstances each HCSA can be considered a separate insurance plan. It is a question of fact and law whether one plan exists or several individual plans exist. HCSAs are discussed in detail in paragraphs 14 to 18 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

Where the HCSAs are part of one group plan, the condition will be satisfied for a particular calendar year if all or substantially all of the benefits paid to all employees in that calendar year are for METC-eligible expenses. Where each HCSA is determined to be a separate plan, the determination will be made on a plan by plan basis (that is on an HCSA by HCSA basis).

For example, assume that an employer provides a self-insured plan that consists of three HCSAs, each with a $5,000 ceiling. Each employee allocates the $5,000 ceiling as outlined in the table below at the beginning of the plan year.

Assuming the HCSAs are part of one group plan, the plan would satisfy the “all or substantially all” condition since 92% ($11,500 / $12,525) of the total benefits paid to all employees in the calendar year are for METC-eligible expenses even though the total ceiling amounts allocated to METC-eligible expenses was only 80% ($12,000 / $15,000).

However, if each HCSA was determined to be a separate plan:

• Ann’s plan would satisfy the “all or substantially all” condition since 95% ($4,000 / $4,200) of the total benefits paid to her in the calendar year are for METC-eligible expenses;
• Sue’s plan would not satisfy the “all or substantially all” condition since 83% ($3,250 / $3,900) of the total benefits paid to her in the calendar year are for METC-eligible expenses; and
• Jim’s plan would satisfy the “all or substantially all” conditions since 96% ($4,250 / $4,425) of the total benefits paid to him in the calendar year are for METC-eligible expenses.

We trust these comments will be of assistance to you.

Yours truly,

Ms. Nerill Thomas-Wilkinson, CPA, CA

Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch