26 May 1998 External T.I. 9801505 - FLEX PLANS, CHANGES IN ALLOCATION

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:

Flex Plans - Change in allocation of credits due to occurrence of specified life events. Is the change permissible where:

a) employee changes allocation mid-year from $500 to $600. Medical expenses incurred prior to change $400 and flex credits accrued $250. Up to $150 of medical expense can be reimbursed by the plan before the end of the year.

b) employee changes the allocation to increase it from $200 to $600. Increase cannot be applied toward expenses incurred before change of allocation. Only $200 of the $400 medical expenses incurred prior to the change would be reimbursed by the plan.

c) employee changes allocation mid-year from $500 to $250. Medical expenses incurred prior to change is $100 and flex credits accrued $250. Up to $150 of medical expenses can be reimbursed from the plan before the end of the year.

Position:

a), b) and c) Yes, as long as the agreement provides for the life events in question and contains rules concerning the restrictions on the reimbursements of the expenses incurred prior to the change of allocation. Also, the expenses incurred by single people prior to the change must be for themselves and not for the future spouse. Otherwise, the change would be retroactive.

Reasons:

IT-529 par. 6 allows such a change as long as it is not retroactive and the "life event" is provided for in the agreement governing the plan.

			980150
XXXXXXXXXX 		N. Mondou, M.Fisc.
(613) 957-8961

Attention: XXXXXXXXXX 

May 26, 1998

Dear Sir:

Re: Flexible Benefit Plan

This is in reply to your letter dated January 16, 1998, in which you requested our views with respect to changes made in respect of an allocation of flex credits to Private Health Services Plan ("PHSP") upon the occurrence of certain events. You indicated in your letter that this request is not in respect of a specific proposed transaction.

The three hypothetical situations you described are as follows. In each situation, the flex credits are granted equally on a pay period basis during the calendar year in 26 equal installments. Also, under the terms of the particular PHSP, unused credits at the end of the calendar year may be carried forward to the next calendar year and, if not used, are forfeited at the end of such subsequent calendar year. Claims for reimbursement may not be carried forward to a subsequent calendar year. Finally, the specific life events mentioned below are expressly covered by the agreement governing the flexible benefit plan.

Employee A

Employee A allocated at the end of 1997 $500 of flex credits to his or her PHSP account for the 1998 calendar year. On July 1, 1998, Employee A’s status changes from single to married, which entitles Employee A, under the terms of the plan, to make new benefit elections for the remainder of 1998. Employee A incurred $400 of eligible expenses up until June 30, 1998 and had accrued $250 of flex credits in his or her PHSP account. Under the new benefit elections, Employee A allocates $600 of credits to the PHSP, on an annual basis, which translates to $300 of flex credits for the remainder of 1998.

Under this scenario, $550 of flex credits would be allocated to Employee A’s PHSP account for 1998. The $400 of eligible expenses incurred in the first half of 1998, plus up to $150 of additional eligible expenses incurred in the second half of 1998 may be reimbursed from the PHSP account. Any unused balance in the PHSP account at the end of 1998 may be carried forward to 1999.

For the purposes of this letter, we assumed that the $400 of medical expenses incurred prior to the change in the allocation was incurred for the sole benefit of Employee A.

Employee B

Employee B is also single and allocated only $200 of credits to the PHSP account for the 1998 calendar year. As of June 30, Employee B has incurred $400 of eligible expenses. On July 1, 1998, Employee B’s status changes from single to married. With Employee B’s new allocation as of that date of $600 of credits, Employee B’s total allocation for 1998 would be $400 of credits (i.e. $100+$300).

In your view, the additional $200 of credit allocation in the last half or 1998 (i.e. $300 minus the $100 originally allocated) could not be applied toward expenses incurred up to June 30, 1998. In a telephone conversation on March 5, 1998, (Newton/Mondou) you confirmed that this would be expressly provided for in the agreement regulating the plan. You also confirmed that only up to $200 of medical expenses incurred for the sole benefit of Employee B prior to July 1, 1998 could be reimbursed under the terms of the plan.

Employee C

Employee C allocated $500 to his or her PHSP account for the 1998 calendar year. As of July 1, 1998, Employee C’s status changes from married to single and Employee C changes his or her flex credit allocation to the PHSP account to $0 for the remainder of 1998. Up until June 30, 1998, Employee C had accrued $250 of credits and had incurred $100 of eligible expenses. Any further eligible expenses for the remainder of 1998, up to $150, may be reimbursed to Employee C under the terms of the plan.

Our comments-

As stated in paragraph 6 of the Interpretation Bulletin IT-529, a flexible employee benefit program may permit an employee to make certain changes, including mid-year reductions in coverage, to accommodate a life event without adversely affecting the tax treatment of benefits under the plan. This is provided that the changes do not require a withdrawal of funds credited to that benefit option contrary to the terms of that policy or plan and the definition of life event in the flexible employee benefit program is confined to events such as those described in the Interpretation Bulletin. However, any such change cannot be made on a retroactive basis.

We confirm that the changes in the allocation of the flex credits you illustrated in your three hypothetical situations are permissible changes as they meet the requirements set out in paragraph 6 of the Interpretation Bulletin mentioned above.

We trust that these comments are of assistance but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transactions.

Yours truly,

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