24 October 1995 External T.I. 9522905 - HEALTH SPENDING ACCT WITH VARYING PLAN YRS & AMT OF CR

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:

1) health spending account & whether the plan year can vary according to employee
2) can the plan use the health care spending account to adjust for changes in flex credits allocated by salary or for changes in cost of benefits
-other issues include c/f of credits at year end, changes for life events

Position:

1) yes, the plan year for each employee can begin with the employee's month of birth
2) no the amount of flex credits must be fixed at beginning of year & cannot be reallocated except in the event of a life event (although some portion of the fixed amount of credits allocated prior to the start of the plan yr may have been calculated with reference to the employee's salary at that time

Reasons:

if the credits can be transferred between options or if the amount of credits is not fixed, the credits may be seen as additional remuneration or the flex plan may be considered an employee benefit plan

A. Humenuk
XXXXXXXXXX		952290

Attention: XXXXXXXXXX

October 24, 1995

Dear Sirs:

Re: Health Care Spending Accounts

We are replying to your letter of August 17, 1995 concerning flexible benefit plans and health care spending accounts.

You ask us to confirm your understanding of the tax consequences relating to flexible benefit plans and in particular to health care spending accounts.

Although you have asked for our comments generally, the situation presented appears to relate to an actual plan. Should your questions relate to a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should your questions involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate Tax Sevices office for their comments. We are, however, prepared to provide some general comments.

Your questions can be summarized as follows:

Can employees make their decision to participate in a health care spending account during their month of birth immediately preceding the plan year?

Response

The allocation of flex credits, including the decision as to whether or not to participate in a health care spending account, must be made before the beginning of the plan year. Taken in context with your second question, this question seems to contemplate a plan year which coincides with the calendar year yet requires employees to make their selection of benefits in the month of their birth which precedes the commencement of the plan year. While there is no restriction as to how far in advance of the beginning of the plan year the allocation of flex credits can be made, there does not appear to be any advantage in requiring an employee to make choices so far in advance of the commencement of the plan year that the employee's circumstances are likely to change prior to that date. However, a plan year does not need to be the calendar year nor does it need to be the same for all employees. For administrative purposes, employees may be required to make their annual selections prior to the month of their birth in which case, a plan might dictate that each employee's selection would be valid for the plan year commencing with the month of their birth.

Is it possible for an employee who experiences a change in family status to make a change in the amount allocated to a health care spending account effective for the period beginning on the date of the change in family status and ending on December 31 following their next birth date?

Response

Notwithstanding that an employee makes an irrevocable allocation of flex credits prior to the commencement of the plan year, it is permissible for a plan to allow employees to make certain changes to accommodate a life event such as marriage, birth of a child or the loss of a dependant provided that such change does not involve a distribution or payment out of a plan otherwise than in accordance with the terms of that plan. For example, if an employee allocates a certain amount to a health care spending account prior to the beginning of the year and is able to draw on the full amount of credits so allocated at any time in the plan year, then it would not be possible to reallocate any of the credits so allocated to any other option that is not itself a private health services plan. Thus if an employee acquired a new dependant in the year and wished to increase coverage under the employer's regular medical and dental plan, it would be possible to "pay" for the increased coverage with a transfer of credits from the health care spending account because the premium payable in respect of the medical or dental plan would be an eligible medical expense of the employee within the meaning of subsection 118.2(2) of the Income Tax Act. However, it would not be possible to transfer or reallocate an amount from the health care spending account to pay for increased life insurance for the dependant since the premium on life insurance is not an eligible medical expense.

However, if the flex credits allocated to the health care spending account by the employee prior to the beginning of the plan year are made available to the employee on a periodic basis (i.e. the employee is only entitled to request a reimbursement to the extent of credits accrued to that date), then the amount not yet accrued to the health care spending account could be reallocated to another option where the employee has experienced a change in family status. It should be emphasized however, that while a plan may provide that credits allocated to a particular option prior to the beginning of the year accrue to the employees on a periodic basis, the amount allocated by the employee to a particular option cannot be reallocated during the plan year except where certain life events occur which alter the individual's family status for the purpose of the plan.

If flex credits are allocated as a percentage of salary, can an employee elect to deposit all monthly flex credits in excess of the amount needed to pay for other options to a health care spending account? In our telephone conversation of October 2, 1995 (XXXXXXXXXX/Humenuk), you indicated that the amount of the excess credits might vary as a result of a change in the price of the other options or as a result of a change in the amount of salary. Alternatively, you ask if an employee can elect to deposit a fixed dollar amount of the monthly flex credits to a health care spending account.

Response

The Department's position on flexible benefit plans does not apply where an employee's credits are not fixed prior to the commencement of the plan year or where the credits can be reallocated to other benefit options during the year otherwise than in the event of a change in the family status of the employee. While it is not unusual to see a portion of the fixed credits allocated to an employee computed as a percentage of the employee's salary as of the enrollment date, the amount of credits allocated under a plan may be considered as additional remuneration at the time the credits accrue to the employee or alternatively, the plan may be considered to be an employee benefit plan where the credits allocated to an employee under the plan can vary during the year according to the employee's level of salary.

Can the balance of credits in a health care spending account on December 31 be carried forward into the next plan year?

Response

With respect to the issue of carryforward of credits not used in a plan year, it is our view that a plan which permits the carryforward of either credits or medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a private health services plan solely by reason of the carryforward provision in the plan. Thus, a plan which permits a carryforward of credits in excess of 12 months from the end of the plan year would not likely qualify as a private health services plan because it would not have the necessary element of risk to be considered a plan of insurance.

We caution that the above-noted comments represent our views generally on the subject of health spending accounts and should not be construed as confirmation of any particular plan as a private health services plan.

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