21 November 1997 External T.I. 9719305 - HEALTH OPTIONS IN FLEX BENEFIT 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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether the addition of two separate health care options to a flexible benefit program for employees will cause it to lose its status as a Private Health Services Plan as defined by subsection 248(1).

Position TAKEN:

Question of fact. General comments provided.

Reasons FOR POSITION TAKEN:

Clarified that (a) amounts of available flex credits that an employee opts to receive in cash is to be included in employment income in the year such amount is received, (b) as long as the decision to convert current year credits to cash is made prior to the beginning of the plan year then the receipt of such amounts will not cause the plan to lose its tax status as a PHSP, (c) where credits are allocated on a proportionate basis throughout the year the 12-month deferral permitted by the Department will continue to apply but only from the end of the plan year in which such credits are allocated.

XXXXXXXXXX		                            971930

Attention: XXXXXXXXXX

November 21, 1997

Re: Health Care Expense Account

This is in response to your letter of July 15, 1997 wherein you asked that we confirm whether the addition of a flexible medical benefits plan to a flexible benefit plan would qualify as a "Private Health Services Plan" (PHSP), as that term is defined in subsection 248(1) of the Income Tax Act (the "Act").

In your letter you indicate that the employer is proposing to offer one of two mutually exclusive flexible health benefit plan options to its employees as part of an overall flexible benefit plan. In the first option you indicate that at the start of each policy year the employer will allocate the annual health credits to the employee unless the employee elects to immediately convert those credits to cash. The decision to convert all or a portion of the health credits into cash must be made prior to the start of the policy year, in which such credits were allocated, and any unused credits at the end of the policy year can only be carried forward for up to 12 additional months. If at the end of that time the health credits are still unused they must be forfeited.

In the second option you indicate that the annual health credits will be allocated to each employee on a pro-rata monthly basis (i.e. the credits are not allocated in an annual lump-sum but on a month by month basis). As above, the employee must decide prior to the start of each policy year what portion of that year's total annual credits will be converted to cash. We understand that under both options only eligible medical expenses that do not exceed the unused credit balance in a particular employee's account can be claimed for reimbursement.

In addition to requesting our views as to whether the above described flexible health benefit plan options would qualify as a PHSP you also request our view as to whether the "12 month carry forward period" would commence at the start of the following policy year or at the start of the 12th month after the month in which the credit was actually allocated.

The facts set out in your letter relate to proposed transactions. Confirmation of the tax consequences of proposed transactions will only be provided in response to a request for an advance income tax ruling following a review of the relevant facts and documentation. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R3 dated December 30, 1996. We are, however, prepared to provide you with the following general comments.

It is our understanding that in a typical flexible benefit program ("Flex Program") an employer may offer its eligible employees a variety of benefits from which each employee is free to select to meet individual needs. Under such a Flex Program the employer allocates notional credits ("flex credits") to each employee prior to the beginning of the plan year which represent the employer's contribution to benefits. The employees use these flex credits to acquire the various benefits available under the Flex Program. Generally as long as employees are required to choose benefits and the manner in which such benefits will be funded prior to the beginning of the plan year, and the selection is irrevocable (with limited exceptions throughout the duration of the plan year) then the Flex 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.

We understand that some Flex Programs provide for a secondary health care spending plan (herein referred to as "HCSP"). These plans are comprised of individual employee accounts that provide for the reimbursement of eligible medical and dental expenses as defined by the terms of the plan. A health care spending account may qualify as a PHSP provided that it meets the criteria set out in the current version of IT-339 Meaning of "private health services plan." If it does not qualify as a PHSP, the amount of any benefit received out of the plan will be taxable to the employee.

An employee may, in some cases, choose to receive a portion of his or her available flex credits in cash with a lesser amount of credits allocated to the various options under the terms of a Flex Program. Such amounts received in cash are considered to be employment income in the calendar year in which they are received and will not generally affect the status of a particular plan as long as the employee's choice is irrevocably made prior to the beginning of the plan year.

While a plan which includes a carry forward provision undoubtedly reduces the risk of loss to the employee, a plan which permits the carry forward of either the unused allocation or eligible medical expenses (but not both) up to a maximum of 12 months from the end of the plan year will not be disqualified as a PHSP solely by reason of the carry forward provision in the plan regardless of whether the allocations are made at the beginning of or throughout the plan year.

We caution that the above-noted comments represent our views generally on the subject of secondary health care plans within a Plan and should not be construed as confirmation of any particular plan as a PHSP.

We trust our comments will be of assistance to you.

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