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 XXXXXXXXXX
RE: Flexible Benefit Plans
We have been asked to reply to your letter dated April 16, 1993 addressed to Mr. C. Balestreri of the Toronto District Office. We apologize for the delay in our response.
You describe a plan whereby an employee decides before December of each year how much of his or her future salary increase he or she will forgo in order that the funds be placed in a health spending account. The employee can then use these funds to pay for qualifying medical expenses, co-insurance and deductibles payable under the company medical plan as well as other premiums that the employee is required to pay under the employer's benefit program.
It is your understanding that the amount of salary forgone is not required to be included in the employee's income. You have asked whether the employees can be offered certain options with respect to the funds which have not been utilized within the year to reimburse the employee for qualifying medical expenses and other premium payments. The options you are considering include a carryforward provision, the transfer of funds into RRSP accounts administered on a group basis and the withdrawal of funds in cash where such withdrawal is considered employment income to the employee at the time the funds are withdrawn.
We would first like to clear up an apparent misunderstanding concerning the taxation of funds contributed to an employer-sponsored flexible benefit plan. Where employees forego an amount to which they are otherwise entitled in order to obtain or increase the amount of credits available under a flexible benefit plan, the Department considers any such additional credits to be taxable under section 5 of the Income Tax Act at the time that they are credited to the plan. This applies for example, to credits obtained in exchange for salary bonuses, other increases in remuneration and vacation or other leave credits, notwithstanding that the flex credits may be applied to a plan which provides benefits which would otherwise have been non-taxable to the employee.
Where employer contributions to a plan are not dependant upon the forfeiture of salary or other amounts, the taxation of benefits received from the plan depends, in part, on whether or not the plan is an employee benefit plan, a salary deferral arrangement or a retirement compensation arrangement as defined in subsection 248(1) of the Act. In this regard, it is important to distinguish between a flexible benefit plan and the employer-sponsored plans 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 the flex credits to various employer-sponsored plans covered by that plan. Some of these plans may provide benefits which are taxable to the employee and some may provide benefits which are not. Generally speaking however, a flexible benefit plan can be set up so that the taxability of a benefit is not altered by the fact that it is provided under the umbrella of the plan.
One of the more common non-taxable benefits which can be provided through a flexible benefit plan is that of hospital or medical insurance under a private health services plan (PHSP). In order for a 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 either the cash-out or rollover of unused credits to other plans offered under the umbrella of the flexible benefit plan would not qualify as a PHSP. However, a plan which permits the carryforward of either credits or eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely because of such a carryforward provision. A plan which permits the carryforward of credits or expenses for a period in excess of 12 months will not qualify as a PHSP.
In addition, we would like to point out that a plan which purports to be a PHSP will not be considered as such if the plan reimburses expenses (such as the reimbursement of premiums for a plan or insurance other than a PHSP), which do not qualify as medical expenses as defined in the Act.
We caution you that the above comments are general in nature and should not be construed as confirmation of the tax consequences arising from any particular plan.
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
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