6 October 1993 External T.I. 9309625 F - Carryforward of HCSA Credits in 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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Health Care Expense Accounts

We are replying to your two letters of March 29, 1993, concerning the tax implications of health care expense accounts (HCEA) which utilize various methods to deal with unused year-end balances in the account. Reference is also made to our conversation of July 14, 1993 (XXXXXXXXXX/ Humenuk), in which we advised you that our response would be delayed because the question of the extent to which a carryforward would be permitted was then under review.

Your questions are based on an excerpt from a publication by Hewitt Associates entitled "Canadian Handbook of Flexible Benefits". You quote several statements in that publication and ask whether they reflect Revenue Canada's position. We cannot provide a definite answer in this regard since the excerpts do not clearly state the context in which the statements are made. Please note that the comments which follow are not intended as a commentary on those excerpts. If you have a specific question with respect to an actual situation, you should submit a copy of the plan and your question to your local district office in respect of a plan already in place or, if your question relates to a proposed plan or a proposed change to a plan, you may request an advance income tax ruling as described in Information Circular 70-6R2 and Special Release thereto. Nevertheless, we offer the following general comments which will hopefully be of assistance to you.

Before addressing your questions, it is important to distinguish between a flexible benefit plan and the employer-sponsored plans or accounts which form part of that flexible benefit plan. Under a typical flexible benefit plan, before the beginning of the plan year an employee chooses how to allocate "flex credits" to various employer- sponsored plans, which may include a HCEA, covered by that flexible benefit plan. Under a HCEA, an employee may be entitled to be reimbursed for eligible medical expenses to the extent that the employee has allocated flex credits to that plan (the HCEA).

1.     You ask whether Revenue Canada will accept a payout of unused balances in cash.

     Our position on the payout of unallocated flex credits was announced at the 1991 Corporate Management Conference wherein we stated that where an employee elects to utilize less than all of the flex credits allocated by the employer to the provision of benefits offered under a plan, he or she may elect to receive the excess during the benefit year in cash. It should be noted however, that once an employee has elected to allocate flex credits to a particular account or benefit, no changes are permitted to that allocation (except in certain situations where there has been a change in the employee's family status). Consequently, if an employee allocates flex credits to a HCEA which qualifies as a private health services plan (PHSP) as defined in paragraph 248(1) of the Income Tax Act, no amount of the unused balance in that HCEA at the end of the year can be paid out in cash.

2.     You ask whether a flexible benefit plan can be established with employee funding under which both taxable and non-taxable benefits can be provided. You further state that under such a system, the tax payable in respect of the taxable benefits would be remitted to Revenue Canada at the time that the taxable benefit is received by the employee.

     It would appear that this question relates to a particular plan. As stated above, we cannot provide comments in respect of a particular plan without a review of all the relevant facts and documentation.

     Where a plan is funded solely by employee contributions, one would not expect any of the benefits received out of the plan to be taxable. However, where a single plan is funded in whole or in part by the employer and the plan pays both health related expenses which qualify for inclusion in a PHSP and other expenses which do not qualify for inclusion in either a PHSP or a plan described in paragraph 6(1)(a)(i) of the Income Tax Act, the plan will be treated as either an "employee benefit plan" or "employee trust" as described in Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts". The employee would then be taxed on any resulting benefits or allocations as the case may be, in the manner described in that bulletin, regardless of whether or not a particular payment from that plan would have otherwise qualified for inclusion in a PHSP.

3.     You ask for our comments on three possible options which could be offered to an employee in respect of year-end balances in a HCEA; namely the payout of the balance in cash, the rollover of any unused credits to the next plan year or the forfeiture of any such balance.

As stated above, a plan which permits the payout of unused credits in cash will not qualify as a PHSP. This has always been Revenue Canada's position with respect to non-taxable plans within a flexible benefit plan. In order to qualify as a PHSP, a plan must, among other things, be a plan of insurance as explained in Interpretation Bulletin IT-339R "Private Health Services Plans".

With respect to the issue of carryforward provisions, it is our view that a plan which permits the carryforward of either flex credits or medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely by reason of the carryforward provision in the plan. A plan which provides a carryforward provision in excess of 12 months or a plan which provides for the carryforward of both credits and expenses however, will not likely qualify as a PHSP because the plan would not likely have the necessary element of risk to be considered a plan of insurance.

We caution you that the above noted comments represent our considered opinion only and as such, are not binding on the Department.

Yours truly,

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