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.
Principal Issues:
health spending account administered with software by employer as a phsp
Position TAKEN:plan described won't qualify
Reasons FOR POSITION TAKEN:
plan described includes indefinite carryforward of expenses with an option to also carry forward the unused credits,or a portion thereof, indefinately
XXXXXXXXXX A. Humenuk
943118
Attention: XXXXXXXXXX
March 3, 1995
Dear Sirs:
Re: Health Care Plan for Employees
We are replying to your letter of November 24, 1994 in which you ask for a ruling in respect of an arrangement under which an employer pays for medical, dental and vision care expenses incurred by employees up to a predetermined annual limit. We apologize for the delay in our response.
As discussed in our telephone conversation of February 27, 1995 (XXXXXXXXXX/Humenuk), we are unable to give an advance income tax ruling in the case of a "model plan" in which all of the parties to the transaction have not been identified, as is the case with your request. As the plans which use the software described in your letter may vary in the terms and conditions as imposed by each employer, the tax consequences associated with the plans may vary as well. We are, however, willing to offer some limited comments for your general guidance.
In your letter, you describe a software program which is intended to be used by an employer in administering a plan which reimburses employees for medical, dental and vision care expenses incurred by the employee up to a predetermined annual limit. Eligible expenses are determined in advance by the employer or plan administrator. Where an employee has not been reimbursed for the full amount of the annual limit by the end of the plan year, the plan can be set up to permit a carryforward of the unused balance to the next plan year. Other options include forfeiture of the unused balance or carry forward of the unused balance to a specified dollar amount. Where an employee incurs a medical expense in excess of the annual limit, the portion not reimbursed can be claimed in subsequent years until such time as the employee has been fully reimbursed for the expense.
You have asked whether the employer would be entitled to a deduction for amounts paid to the employees under such an arrangement and whether the employees would be required to include the amount of any reimbursement in income.
The value of any benefit received by an employee in respect of, in the course of or by virtue of employment is included in income under paragraph 6(1)(a) of the Income Tax Act (the Act) except those benefits which are specifically exempted by that same provision. Accordingly, the payment or reimbursement of a personal expense of an employee, including a medical expense, would ordinarily be included in income unless the payment or reimbursement is made pursuant to a private health services plan (PHSP) as defined in subsection 248(1) of the Act.
As stated in paragraph 7 of the enclosed Interpretation Bulletin IT-339R2, an arrangement where an employer is obligated to reimburse its employees for medical or hospital expenses may come within the definition of a PHSP where the employer is obligated by the employment contract to pay for such expenses. However, in order for a particular plan or arrangement to qualify as a PHSP, it must involve a reasonable element of risk which is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP. While a carry forward period undoubtedly reduces the risk of loss to the employee, it is our view that a plan which permits the carry forward of either the unused allocation 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 carry forward provision in the plan.
One question we are often asked is whether a plan can permit some employees to carry forward credits while others carry forward expenses and also whether it is permissible for an employee to carry forward expenses in one year and credits in the following year. As stated above, it is our view that a plan which permits the rollover of unused expenses as well as credits does not have a sufficient degree of risk to qualify as a PHSP. Thus, a plan which permits some employees to carry forward credits and others to carry forward expenses would not qualify as a PHSP.
In order for an arrangement to qualify as a PHSP, coverage must be limited to medical expenses as defined in subsection 118.2(2) of the Act. Where a plan or arrangement covers expenses in addition to medical expenses, the plan will not qualify as a PHSP but instead may be treated as an employee benefit plan or, if administered directly by the employer, the reimbursement would be treated as a taxable benefit to the employee.
Concerning the issue of deductibility of amounts paid by the employer, your description of the plan suggests that the employer would reimburse the employee directly upon presentation of the original invoice and that no separate fund would be set up for this purpose. While some employers may choose to set aside a certain amount in a separate bank account in the employer's name to insure that the funds will be available when required, the employer's deduction would be restricted to amounts paid to the employees under the plan. Where the plan is administered by a person other than the employer, the deduction for the employer will depend on whether the plan is an employee benefit plan or employee trust as defined in subsection 248(1) of the Act or whether it qualifies as a health and welfare trust as described in the attached Interpretation Bulletin IT-85R2 "Health and Welfare Trusts".
In summary, where an arrangement qualifies as a PHSP, the employer will be entitled to a deduction for the amount paid to employees in the year and the employees will not be required to include the amount in income. However, as the plan you describe includes a carryforward of unused expenses for an indefinite period with an option to carryforward the unused credit allocation, it would not qualify as a PHSP as presently designed because it does not involve a reasonable transfer of risk.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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