14 September 1995 External T.I. 9516505 - PRIVATE HEALTH SERVICES PLANS

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:

The issue is whether a self-funded health services plan qualifies as a private health services (PHSP) as defined in subsection 248(1) of the Income Tax Act.

Position TAKEN:

Provided all the necessary requirements are satisfied, the plan would be regarded as being a PHSP.

Reasons FOR POSITION TAKEN:

Such an arrangement is consistent with comments in IT-339R2.

M. Eisner

XXXXXXXXXX 951650
(613) 957-2138

Attention: XXXXXXXXXX

September 14, 1995

Dear Sirs:

Re: Health and Welfare Trusts

This is in reply to your letter of June 15, 1995 which is further to our letter of October 28, 1994 and in which you requested the Department's views on the acceptability of a trust agreement as a health and welfare trust as described in Interpretation Bulletin IT-85R2.

It is our understanding that the trust agreement has been prepared on the basis that it would be used by a number of small corporations for the purposes of establishing a health and welfare trust with respect to a private health services plan (PHSP). However, pursuant to our telephone conversation on September 12, 1995 (Eisner/XXXXXXXXXX), you indicated that rather than commenting on the trust agreement, you wish to be provided with comments on a self-funded PHSP. In addition, you asked for general comments on the situation where a self-funded PHSP is established by a corporation for its only employee who is the principal shareholder and controls the corporation and the situation where a self-funded PHSP is established for its five unrelated employees of which one of them is the controlling shareholder (The other employees are not shareholders).

Our Comments

As you are aware, paragraph 6(1)(a) of the Income Tax Act (the Act) requires employment benefits received by employees to be included in income. One of the exceptions are contributions made by an employer to a PHSP (See paragraph 1 of Interpretation Bulletin IT-339R2).

In a typical unfunded health services plan, the employer undertakes to indemnify employees an agreed amount for health care expenses incurred by the employees. The quantum of reimbursement in respect of each employee must be reasonable. Indemnification occurs only when the service has actually been provided and proof of entitlement to indemnification has been provided to the employer by the employee. The plan would not be a trusteed plan. Any payments required to be made by the employer would be disbursed from the employer's operating bank account.

With respect to the above type of arrangement, paragraph 7 of IT-339R2 makes the general statement that the related payments may come within the definition of a PHSP and that this occurs where the employer has a contractual obligation to make such a payment. Whether or not such an obligation would exist would involve a finding of fact in each particular situation. However, where an employer provides its employees with details of the health services plan and indicates to them that reimbursement will be provided to the extent provided therein, it is our general view that this requirement has been satisfied.

Two other requirements of PHSPs are set out in paragraphs 1 and 4 of IT-339R2. Paragraph 1 indicates that coverage must be for one or more of the employee, the employee's spouse, and any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption. Paragraph 4 indicates that expenses covered by a PHSP are limited to those which would otherwise have qualified as a medical expense under paragraph 118.2(2) of the Income Tax Act. Terms with respect to these requirements should be included in the plan.

A further requirement is that a PHSP must be in the nature of insurance and, in that regard, must contain the basic elements set out in paragraph 3 of IT-339R2. For example, it is our general view that where each eligible individual is allocated a certain dollar amount in respect of a specific period of time such that the employer's indemnification for the time period could be anywhere between a deductible amount and the dollar amount allocated, it is our view that a health services plan would be in the nature of insurance.

It would follow that, subject to the above comments, a self-funded health services plan established by an employer can qualify as a PHSP.

For a discussion of the tax consequences of a benefit that has been conferred upon an individual in his or her capacity as a shareholder, we refer you to our letter of October 28, 1994.

Where a benefit in respect of a PHSP is granted by a corporation to its sole employee who is also the controlling shareholder, it is the Department's general view that the benefit would be considered to have been conferred on the individual in his or her capacity as a shareholder. In the case of the situation where a self-funded PHSP is established for its five unrelated employees of which one of them is the controlling shareholder, it is our general view that, where benefits are granted by an employer corporation to the five employees in respect of a PHSP, the benefits would be considered to have been conferred on them in their capacity as employees. However, we also note that our comments on this situation have been based on the assumption that the PHSP coverage provided to each employee is identical (i.e., enhanced coverage was not provided to the employee/shareholder).

As a final comment, we wish to mention that this Department will only confirm the income tax implications relating to a proposed PHSP (a proposed transaction) by way of an advance income tax ruling described in Information Circular 70-6R2 dated September 28, 1990 and the related Special Release dated September 30, 1992 which have been enclosed.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch