6 October 1993 Income Tax Severed Letter 9319835 - Carryforward of Balances in a Health Care 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           931983
XXXXXXXXXX                                 A. Humenuk
                                           (613) 957-2134
Attention:  XXXXXXXXXX

October 6, 1993

Dear Sirs:

Re: Advance Income Tax Ruling Request XXXXXXXXXX

In our telephone conversation of September 22, 1993 (XXXXXXXXXX\Humenuk), you advised that the advance income tax ruling request of July 8, 1993 has been withdrawn.

We are accordingly closing our file in this matter. Our account for the time spent on the advance income tax ruling request will be forwarded under separate cover.

You asked that we provide you with some general comments concerning our position on the carryforward of credits allocated to a health care spending account (HCSA) offered within a flexible benefit plan. Please note that the comments which follow relate to HCSA and flexible benefit plans in general and are not intended as a commentary on either the HCSA or the flexible benefit plan offered by XXXXXXXXXX

Under a typical flexible benefit plan, an employee will choose, before the beginning of the plan year, how to allocate "flex credits" to the various plans, which may include a HCSA, offered under the plan. Under a HCSA, the employee is entitled to be reimbursed for eligible medical expenses to the extent that the employee has allocated flex credits to the plan. Typically, such plans are self-insured by the employer; that is, the employer acts in place of the insurer and reimburses the employees directly for qualifying medical expenses incurred.

No amount is included in an employee's income by reason of an employer's contribution to a plan in respect of those flex credits which have been allocated to plans where the benefits from the employer's contributions are excluded from income by reason of subparagraph 6(1)(a)(i) of the Act. In particular, the benefits from a HCSA will not be included in an employee's income where the HCSA qualifies as a private health services plan (PHSP).

In order for a particular plan to qualify as a PHSP, the plan must, among other criteria, be a plan of insurance as explained in paragraph 3 of Interpretation Bulletin IT-339R2 . With respect to a self-insured arrangement, the plan must involve a reasonable degree of risk and thus, a plan which minimizes the employee's risk of being unable to use the flex credits allocated to the plan will not likely be a PHSP. While a carryforward period undoubtedly reduces the risk of loss to the employee, it is our view that a plan which permits the carryforward of either flex credits or eligible 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. However, a plan which permits a carryforward period in excess of 12 months takes on the nature of a savings plan rather than a plan of insurance and would not qualify as a PHSP.

The above noted comments are an expression of our opinion only and as such, should not be construed as acceptance of that portion of the XXXXXXXXXX as a PHSP either as presently constituted or as modified in accordance with the proposed changes.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch