27 April 1998 External T.I. 9730325 - health spending accounts -new employee

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 accounts - expenses incurred prior to participation in the plan

Position:

a plan which reimburses such expenses is not a plan of insurance & thus not a PHSP

Reasons:

can be distinguished from a plan which does provide insurance but permits the carry-forward of expenses in excess of annual ceiling limits

		973032
XXXXXXXXXX 	A. Humenuk

Attention: XXXXXXXXXX

April 27, 1998

Dear Sir:

Re: Health Spending Accounts

This is in reply to your letter of November 17, 1997, concerning the eligibility of certain arrangements as private health services plans (PHSP) as defined in subsection 248(1) of the the Income Tax Act (the "Act").

Specifically, you ask whether an employee can claim a reimbursement from a health spending account (HSA) of medical expenses incurred prior to the employee’s enrollment in that HSA if the terms of the HSA provide for a carry-forward of expenses in excess of the employee’s annual claim limit. Alternatively, you ask whether an employee who is enrolled in a flexible benefit plan, but chooses not to participate in the HSA option for a particular year can claim expenses incurred in that year in the following year if the terms of the HSA provide for a carry-forward of expenses to that following year.

It is the terms of the HSA which determines whether an employee is eligible to claim expenses in the circumstances that you describe. However, if the terms of a plan are such that the plan is not a PHSP, the value of the benefit conferred on the employee is taxable under paragraph 6(1)(a) of the Act. For the purpose of your question, the key issue is whether the HSA is either a medical or hospital care insurance plan or is funded by a contract of insurance (i.e. an insurance policy). As stated in paragraph 3 of the attached Interpretation Bulletin IT-339R2, Meaning of “Private Health Services Plan”, a plan (other than one that is provided by means of a contract of insurance with an insurer) must containing the following basic elements of insurance in order to qualify as a PHSP:

(a) an undertaking of one person,

(b) to indemnify another person,

(c) for an agreed consideration,

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

(e) the happening of which is uncertain.

In our view, a plan which covers expenses incurred prior to an employee’s participation in the plan or expenses incurred during a period in which an employee was not covered by the plan, does not contain the requisite element of insurance and thus, would not be a PHSP. Such a plan can be distinguished from a plan which permits expenses which would be eligible for reimbursement under the plan but for the annual ceiling limit imposed by the plan, to be claimed in the immediately following period. To the extent that an employer is providing medical and dental insurance to an employee by means of an HSA for a particular period, the ability to carry forward expenses incurred in excess of the plan’s annual ceiling limit will not normally disqualify the plan from being a plan of insurance.

We caution you that our comments are general in nature only and may not apply to any particular fact situation and are thus not binding on the Department. As stated in Information Circular 70-6R3 "Advance Income Tax Rulings" dated December 30, 1996, assurance in respect of any particular proposed transaction is given by way of an advance income tax ruling for which a charge is made.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Attachment