14 July 1993 External T.I. 9304605 F - Flexible Benefit Plans, Health Care Expense 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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Flexible Benefit Plans

We are replying to your letter of February 12, 1993 concerning the provision of benefits to employees through a flexible benefit plan. We apologize for the delay in our response.

In your letter, you set out some of the details of a flexible benefit plan which includes the following benefits:

-     extended health care benefits including dental benefits

-     life insurance for employees and their dependants

-     accidental death and dismemberment insurance for employees and their dependants

-     short term and long term disability insurance and

-     a health care expense account.

The plan year ends on June 30th of each year. Each employee is allocated a certain number of flex credits at the beginning of each plan year and the employee allocates the credits to the various options listed above. You also mention that employees may elect to purchase some of these benefits, other than life insurance coverage under $25,000 or short term disability insurance. However, you did not provide us with the details on how such a purchase plan would work.

You ask for confirmation that neither the crediting of the flex credits by the employer to the employees nor the allocation of such credits for the purchase of the benefits (other than employee life insurance coverage in excess of $25,000 and dependant life insurance coverage) will constitute a taxable benefit to such employees pursuant to paragraph 6(1)(a) of the Income Tax Act. You also ask for confirmation that the employer, upon the purchase of the benefit or the allocation of the credit to an employee health care expense account, will be entitled to a deduction for the purchase of the benefit or contribution to the account as the case may be. Finally, you ask for confirmation that a plan such as you describe which includes the carry forward of unused flex credits within the health care expense account, will not be a salary deferral arrangement, an employee benefit plan or a retirement compensation arrangement as those terms are defined in the Income Tax Act (the Act).

As discussed by telephone (Humenuk/XXXXXXXXXX), we do not provide confirmation of tax consequences relating to a specific situation other than by way of an advance income tax ruling. In addition, your letter does not contain enough information to determine the tax consequences associated with the plan in question. We can, however, provide general comments concerning flex plans. Please note that the lack of comment on any particular issue should not be construed as assurance of the tax consequences relating to that issue.

Our position on flexible benefit plans was outlined in a speech by Bryan Dath and the undersigned at the 1991 Corporate Management Tax Conference. In general, the taxability of a benefit is not altered by the fact it is offered under the umbrella of a flexible benefits plan. For example, since dependent life insurance coverage does not meet the definition of group term life insurance as defined in subsection 248(1) of the Income Tax Act, the value of such a benefit will be included in the employee's income as a taxable benefit at the time the employer pays the premium in respect of such coverage whereas an employer's contributions to a group sickness or accident insurance plan, a private health services plan, or a group term life insurance policy (as defined in the Act) with coverage of $25,000 or less will not be required to be included in income, notwithstanding that both taxable and non-taxable benefits are provide under the same flexible benefits plan. In this regard, we would stress that it is a question of fact as to whether any particular benefit is taxable and cannot be determined without a review of all the relevant documentation.

In your description of the health care expense account, you indicate that once the credits are allocated to the account, unused amounts will automatically carry forward to the next plan year. In the event of the termination of employment, any unused credits are forfeited. In our view, a plan which provides for an unlimited carry forward of unused credits or unused expenses is not a plan of insurance and thus cannot be a private health services plan as defined in subsection 248(1) of the Act. Thus, the health care expense account as described in your letter would be treated as an employee benefit plan unless it is otherwise designated as an employee trust. Further information on employee benefit plans and employee trusts is found in Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts" dated March 28, 1985 and special release thereto dated May 31, 1991.

Your letter does not say how the short term disability insurance varies from the long term disability insurance or why an employee is able to purchase one type of insurance and not the other. Please note that a plan to provide coverage for an employer's obligation for sick leave credits is not considered a group sickness or accident insurance plan as referred to in paragraph 6(1)(a) of the Act. In such a case, it is the employer's obligation that is being insured and any payments out of such a plan to employees will be treated as ordinary remuneration from employment.

With respect to your questions concerning the timing of the employer's deduction for benefits purchased or amounts allocated, the employer will be entitled to deduct the amount expended for the various insurances provided that the cost is reasonable in the circumstances and is not a prepayment in respect of future years' insurance. However, where an employer deposits an amount to an account to be held contingently for its employees' health care expenses, such an amount is not deductible by the employer when so contributed by reason of paragraph 18(1)(e) of the Act.

The timing of the taxation of any taxable benefits which are provided under the plan will depend on whether the portion of the plan which provides such benefits is considered an employee benefit plan, an employee trust, a salary deferral arrangement or a retirement compensation arrangement. Since such a determination involves a finding of fact with respect to the particular plan, we cannot be more definitive on this issue nor can we comment on your last question.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch