13 July 1992 External T.I. 9212295 F - Flexible Credits

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.

Attention:  19(1)

July 13, 1992

Dear Sirs:

Re: Flexible Credits

This is in reply to your letter of April 14, 1992 wherein you requested the Department's position on a flexible spending account. More specifically, you ask whether a flexible spending account can cover:

1.    a)     deductible amounts not covered by medical and dental plans (e.g. the first $50 is borne by plan members);

b)     co-insurance amounts paid by employees (e.g. 20% not covered by dental plans);

c)     amounts in excess of amounts covered under employer medical and dental plans (i.e. in excess of plan limits), or amounts simply not covered in plan; and

d)     fixed premiums for medical, dental or long-term disability plans.

You have also asked the following questions:

2.     Can the amount contributed by an employee vary according to position held or length of service (no shareholder/employees)?

3.     Must an employee who leaves the company (voluntarily or otherwise) forfeit the amount remaining in the plan, or can the amount simply be paid out in cash at the time of departure and added to T4 income?

4.           Will Revenue Canada issue rulings as to what items within a plan will be considered taxable benefits?

OUR COMMENTS

We will assume that the flexible spending account is in fact a Supplemental Health Care Account ("SHCA") established to cover expenses that are not covered by a standard Private Health Services Plan ("PHSP"), as this term is defined in subsection 248(1) of the Income Tax Act (the "Act"), and that the SHCA also meets this definition.  As discussed in paragraph 3 of Interpretation Bulletin IT-339R2, a PHSP must be in the nature of insurance and must contain the following basic elements:

i)      an undertaking of one person,

ii)      to indemnify another person,

iii) for an agreed consideration,

iv)      from a loss or liability in respect of an event,

v)      the happening of which is uncertain.

Furthermore, as indicated in paragraph 4 of IT-339R2, the coverage under a PHSP must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.  With respect to fixed premiums for medical, dental or long-term disability plans, the benefits derived by the employees by the payment of the premiums by the employer would not be taxable under paragraph 6(1)(a) of the Act provided the medical, dental or long-term disability plans are plans described in subparagraph 6(1)(a)(i) of the Act.

With respect to your second question, provided the employees are not shareholders, the Department considers that, where a PHSP is self-insured (i.e., the consideration for the "insurance" is regarded as the employees' covenants in their contract of service with the employer), all employees (or all employees within a specific category) should be covered in one plan with the same coverage for each employee.

With respect to your third question, in situations where benefit payments are received by an employee or by the spouse and/or dependent children as a result of the subsequent use of unused credits remaining in his or her SHCA at the time of his or her termination of employment, retirement or death, it is the Department's position that, in order for the health care plan to qualify as a PHSP, the plan must involve a reasonable element of risk which is assumed by the employer.  Plans which permit the choice of a rollover or cash-out of unused credits would not qualify as a PHSP.  A plan that permits the rollover of unused expenses as well as credits would also likely not qualify.   Plans which permit the rollover of unused credits to be applied to other plans under a cafeteria plan are not considered to be a PHSP.  However, the Department is prepared to accept, as a PHSP, plans which permit the carry forward of unused credits for a period of one year after the date of termination of employment, retirement or death, after which time any remaining unused credits are forfeited.  In this case, the use of these credits would continue to be received by the employee or by his or her spouse and/or dependent children on a tax-free basis.

With respect to your fourth question, in order to provide you with rulings as to what items within a plan will be considered taxable benefits, we would require all plan documents pertaining to the PHSP or SHCA.  It is not possible to provide you with a ruling that has application to more than one plan as the terms of each plan or arrangement would be different.

These comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may result in a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2, it is not binding on the Department.

We trust the foregoing is of assistance.

Yours truly,

P.D. Fuocofor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch