10 June 1996 External T.I. 9617625 - SELF-INSURED PHSP -HOW REIMBURSE. CAN BE PAID

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:

can an employer reimburse an employee for hospital and medical expenses under a self funded PHSP by 1) giving a reimbursement chq. directly to the employee; 2) reimbursing the supplier of the service directly or 3) added to the employee's pay cheque?

Position:

so long as plan is a PHSP, can reimburse using method 1, 2 or 3. If added to pay cheque, amt. must be identified & segregated from amts subject to payroll deductions

Reasons:

indemnification occurs when the service has been provided & proof of entitlement to indemnification has been provided to the employer by the employee (1,2&3 can accommodate these requirements). These are primarily administrative decisions left to the employer's discretion

		961762
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

June 10, 1996

Dear Sirs:

Re: Self-insured Private Health Services Plan

This is in reply to your letter of May 7, 1996, which asks how an employer may reimburse an employee for medical expenses incurred under a self-insured PHSP. You have asked whether a taxable event would be triggered in the following three situations:

1.The hospital or medical expense is reimbursed directly to the employee by way of a cheque issued to the employee by the employer.

2.The employer reimburses the supplier directly (for example, the dentist).

3.The employee is reimbursed through his or her pay cheque.

Before responding to your specific questions, we refer you to the comments found in Interpretation Bulletin IT-339R2 and, specifically, to the comments in paragraph 7 of that bulletin. An arrangement whereby an employer reimburses its employees for the cost of medical or hospital care may, or may not, come within the definition of a PHSP. A PHSP exists if the employer is obligated under the employment contract to reimburse such expenses incurred by the employees or their dependants. The consideration given by the employee is considered to be the employee's covenants as found in the collective agreement or in the contract of service. In a typical unfunded private health services plan, the employer undertakes to indemnify employees, up to a specified limit, for hospital or medical expenses incurred by the employees or their dependants. 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 PHSP is not a trusteed plan and there is no segregation of funds to the plan.

When an arrangement for an employer to reimburse employees, for hospital and medical expenses incurred by the employees or their dependants, meets the definition of a PHSP, then, the employer may reimburse the employee in any of the ways queried by you. If the reimbursement is added to the amount of a payroll cheque, the reimbursement should be separately identified and would not be subject to the usual payroll deductions or included in the employee's gross income. The employer could choose to pay the supplier of the hospital or medical service directly, if such terms are acceptable to the supplier, without tax repercussion to the employees. Also, as discussed above, the service must have been already provided to the employee, or his or her dependant, and proof of indemnification must be provided to the employer.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch