30 November 1995 Ruling 9601643 - HEALTH SPENDING PLAN AS 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.

Principal Issues:

health spending plan as a PHSP

Position:

qualifies as a PHSP (is a scheme of self insurance in that corporate employer has obligated itself to reimburse employees for all eligible medical expenses and services to a ceiling identified in the plan

Reasons:

		960164
XXXXXXXXXX	

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling - Health Spending Plan
Health Spending Account
XXXXXXXXXX

This is in reply to your request for an advance income tax ruling dated XXXXXXXXXX, concerning the proposed establishment of a Health Spending Plan (HSP) for executive employees of XXXXXXXXXX We acknowledge receipt on XXXXXXXXXX, of your deposit as well as additional information. We received your revised HSP document with an effective date of XXXXXXXXXX with final modifications to the Plan on XXXXXXXXXX.

Facts:

The facts and proposed transaction can be summarized as follows:

1. XXXXXXXXXX is a private Canadian Company with approximately XXXXXXXXXX employees. The organization

XXXXXXXXXX

2. Effective XXXXXXXXXX intends to introduce a new health care benefit program for eligible employees: the HSP. The HSP is an agreemement between XXXXXXXXXX and its employees that will provide for 100% reimbursement of eligible health-related services or expenses to a maximum equal to 20% of an employee's annual earnings (spending account dollars).

3. All executives of XXXXXXXXXX will be eligible to become members of the HSP. All executives actively employed at XXXXXXXXXX and all new executives, upon accepting employment, will be automatically enrolled in the HSP. The executive group is composed of the most senior management employees of the company. At this time, this numbers XXXXXXXXXX The executives are not shareholders in the corporation nor are they voting members of XXXXXXXXXX board of directors.

4. Employees may only use their spending account dollars to pay for eligible health-related services including dental care, prescription drugs and vision care. Eligible health-related services and charges will only encompass those expenses that would otherwise qualify for deduction as a medical expense under subsection 118.2(2) of the Income Tax Act ("the Act"). Only expenses incurred after the implementation date of the plan will be recognized as eligible expenses under the plan.

5. An eligible employee will be able to request a reimbursement of eligibile medical expenses incurred by the employee, the employee's spouse, or any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption.

6. Under the terms of the HSP, an eligible employee will be required to submit original receipts, with the completed claim form, to XXXXXXXXXX for reimbursement. Once the claim is approved, the plan will pay for 100% of all such expenses to the maximum identified in 2 above.

7. At the end of the benefit year (a benefit year is from January 1 to December 31), any unused portion of an employee's annual spending account dollars will be rolled over to the subsequent year. This rollover can be for a one-year period only. If there is still an unused prior year amount in the employee's spending account dollars at the end of the subsequent year, such amount will be forfeited.

8. The HSP will be self-insured by direct reimbursement of eligible expenses by XXXXXXXXXX to eligible employees. XXXXXXXXXX will be the HSP's administrator.

9. Details of the HSP will be outlined in an announcement letter to all eligible employees.

10. To the best of your knowledge, none of the issues involved in this ruling request are being considered by a taxation services office or taxation centre in connection with a tax return already filed and none of the issues are under objection.

Purpose of Proposed Transaction

11. XXXXXXXXXX wishes to enhance its employee benefit program for its executives through the addition of the HSP as an aid in retaining current employees as well as attracting future employees of the calibre required to XXXXXXXXXX In addition, by providing the above benefits through a contractual, self-administered and self-funded Health Spending Plan, rather than through conventional insurance contracts, XXXXXXXXXX will reduce the net cost of providing such a benefit to executives without jeopardizing their rights under such a program.

Advance Ruling Requested and Given:

Provided that the above statements of fact and the proposed transaction are accurate and constitute a complete disclosure of all the relevant facts and proposed transaction, and that the proposed transaction is executed as proposed herein, we confirm that:

(1) the proposed HSP qualifies as a "private health services plan" as that term is defined in subsection 248(1) of the Act;

(2) the payments made out of the plan by XXXXXXXXXX to eligible employees will not be included in the income of the eligible employees because of the exception provided for by paragraph 6(1)(a) of the Act with respect to benefits derived from such a plan;

(3) the payments by XXXXXXXXXX to its employees as reimbursements of eligible medical expenses under the terms of the plan will be deductible as a business expense in computing its income for tax purposes up to the limitations provided for in the HSP.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by the Department of National Revenue, Taxation and is binding on the department provided that the transaction described herein is executed on or before XXXXXXXXXX.

Yours truly,

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch