6 February 1996 External T.I. 9531315 - PRIVATE HEALTH SERVICES PLAN

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:

whether in a "cost plus" plan for PHSP the administrator may be an association to which the employer belongs

Position:

yes-not necessary that administrator be only a trusteed plan or insurance co.

Reasons:

									953131
XXXXXXXXXX							Sandra Short

Attention: XXXXXXXXXX

February 7, 1996

Dear Sirs:

Re: "cost plus" plan for a Private Health Services Plan

This is in reply to your correspondence of November 24, 1995 which queries whether a third party, who is an association to which the employer belongs, may administer a proposed private health services plan for the employer. The third party, besides administering the plan, will issue cheques to the employees, and then invoice the client for the claims plus a small administration fee. You have asked whether such an arrangement meets with the provisions of the Income Tax Act (the Act). We have assumed, for the purposes of our reply, that your central query is whether such an arrangement will be considered a "private health services plan" (PHSP) as that term is defined in subsection 248(1) of the Act.

We have enclosed for your information a copy of Information Circular 70(6R2 and the subsequent special release dated September 30, 1992 which sets out the guidelines under which an advance income tax ruling is issued. We cannot confirm the tax consequences of a particular transaction without a thorough review of all relevant facts and documentation pertaining to the transaction. We will, however, provide you with the following general comments which may be of assistance to you.

A PHSP is a plan in the nature of insurance. As explained in paragraph 3 of Interpretation Bulletin, IT-339R2, the plan must contain the following basic elements:

(i) an undertaking by one person,

(ii) to indemnify another person,

(iii) for an agreed consideration,

(iv) from a loss or liability in respect of an event,

(v) the happening of which is uncertain.

Furthermore, and as indicated in paragraph 4 of the bulletin, the coverage under a PHSP must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provision of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

As explained in paragraph 6 of Interpretation Bulletin IT-339R2, in a "cost plus" plan an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan. The employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employee's contract of employment requires the employer to reimburse the plan or insurance company for the proper claims (filed by the employee) paid, and a contract exists between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing.

Provided that the risks to be indemnified are those described in paragraphs (a) and (b) of the definition of "private health services plan" in subsection 248(1), such a plan qualifies as a PHSP. Your enquiry questions, assuming that all other requirements are met as discussed above, whether the reference to "a trusteed plan or insurance company" can be extended to include an association to which the employer belongs. While it is our understanding that third party administration services for PHSPs are offered primarily by insurance companies, it is possible that such services could be purchased from an association to which the employer belongs where all other conditions discussed above are met. Section 67 of the Act would require that the administration fee paid to the third party administrator be reasonable in the circumstances.

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

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