6 June 1997 External T.I. 9711655 - HEALTH SERVICES PLAN - CHANGE IN EMPLOYMENT STATUS

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether a "private health services plan" within a flexible benefit plan retains its status where the plan provides for a prospective re-enrolment feature when an employee changes employment status (i.e. between full-time, part-time & management).

Position TAKEN:

The re-enrolment feature by itself will not cause the loss of plan status unless such re-enrolment is not applied prospectively.

Reasons FOR POSITION TAKEN:

A PHSP by definition (subsection 248(1)) requires the existence of an insurance element (i.e. a contract of insurance or insurance plan). The concept of insurance does not allow a retroactive application on the occurrence of certain events.

971165
XXXXXXXXXX G. Donell

Attention: XXXXXXXXXX

June 6, 1997

Re: "Private Health Services Plan" within a flexible benefit plan - paragraph 6(1)(a) of the Income Tax Act

This is in reply to your letter of April 25, 1997 in which you have asked us to confirm that the status of a "Private health services plan" as defined in subsection 248(1) of the Income Tax Act (the "Act"), within a flexible benefit plan, will not be jeopardized solely as a result of a design feature which permits employees to re-enrol during a plan year as a result of a change in employment status.

It is our understanding that in a typical flexible benefit program an employer offers eligible employees a selection of benefits from which they can choose to meet individual needs. The employer allocates flex credits to eligible employees prior to the beginning of the plan year. These employees use or allocate these credits to acquire the various benefits available under the program. Generally as long as employees, prior to the beginning of the plan year, are required to choose benefits, the manner in which such benefits will be funded and the selection is irrevocable with limited exceptions throughout the duration of the plan year then the flexible benefit program can be segregated into multiple parts and the taxation of the benefits offered will not be altered by the fact that it is offered under the umbrella of such a program.

One of the exceptions to the requirement that the selection be irrevocable throughout the plan year is a change in employment status (for example from any of part-time, full-time, management etc.). Where such change in status occurs an employee may be required to make changes to the original selection of benefits to accommodate the increase or decrease in the amount of flex credits available. As long as the changes are not made retroactively such accommodation for a change in employment status will not, in and of itself, jeopardize the status of a private health services plan and cause an amount to be included, with respect to that plan, in the income of an eligible employee's under subsection 5(1) or paragraph 6(1)(a).

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch