3 August 1999 Internal T.I. 9919057 - HEALTH CARE SPENDING ACCOUNT

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: General questions concerning the Department's position on health spending accounts as part of a flexible employee benefit plan.

Position: General comments provided.

Reasons: For the most part, the answers provided were based on the comments in IT-529.

XXXXXXXXXX 	J. Gibbons
		5-991905
Attention: XXXXXXXXXX 

August 3, 1999

Dear XXXXXXXXXX:

Your letter of April 27, 1999, addressed to the XXXXXXXXXX Tax Centre, was forwarded to us for reply. In your letter, you asked a number of questions concerning the Department’s views on setting up a “flexible health care spending account.”

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

For the most part, the issues raised in your questions are addressed in Interpretation Bulletin IT-529, “Flexible Employee Benefit Program,” a copy of which is enclosed. We suggest that you review this bulletin to obtain an overall view of the Department’s position on flexible employee benefit programs (“flex plans”).

Your Question

The City is establishing a percentage of payroll as its allocation for group benefits. Is there a limit as to the percentage of gross salary that can be allocated to a flexible health care spending account? If so, what is it?

Our Views

This issue is discussed in paragraph 9 of IT-529. In general terms, there is nothing wrong per se with allocating flex benefits based on a percentage of salary. However, the conversion of any portion of an employee’s salary to flex benefits will result in the inclusion of the amount of salary so converted, unless this occurs upon the renegotiation of a contract of employment due to the expiry of a former employment contract. However, if an employment contract is renegotiated during the term of an employment contract to decrease salary and increase the allocation of flex benefits, the additional benefits so allocated will be included in the employee's income as salary. Also, the benefits acquired will be considered to have been provided through employee contributions.

Your Question

Can the percentage or a fixed amount vary between different work units within an organization? Between employees in a specific work unit? That is, can one employee choose an increased allocation to a HCSA instead of a wage increase?

Our Views

The ability of an employee to tailor a benefit package for his or her particular needs is the essence of a flex plan. In this regard, we refer you to the summary of IT-529, which states that flex plans can generally be described as a program of delivering company benefits where the employees are able to select the type and level of coverage from among a menu of available benefits. These programs are generally implemented to permit employees to build an individualized benefit program that most closely meets their coverage needs and budget requirements and to change their benefit elections over time as their life circumstances change. In our view, the “fixed amount” can vary among work units pursuant to negotiated salary and wage contracts. Also, insofar as the “fixed amount” is concerned, an employee could choose wages rather than an allocation to an HCSA, if permitted under the particular flex plan.

Your Question

The City has a group benefits policy wherein employees are required to participate in life, long-term disability, accidental death and dismemberment as well as optional health and dental. Please confirm that premiums for health and dental benefits can be paid through allocations from a flexible health care spending account. If the premiums for health/dental benefits exceed the employer’s allocation, is there any requirement to record this as a transaction in a HCSA?

Our Views

In general terms, the premiums for health and dental benefits can be accounted for through allocations in a flex plan. In order that benefits received under a health care spending account (“HCSA”) be non-taxable, the HCSA must qualify as a “private health services plan” (“PHSP”). The requirements to qualify as a “private health services plan” are discussed in Interpretation Bulletin IT-339R2, “Meaning of ‘Private Health Services Plan.’” One of the requirements is that the plan must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified under the provisions of subsection 118.2(2) in the determination of the medical expense tax credit. In this regard, premiums to an insurance carrier for a medical or dental plan qualify as a medical expense under subsection 118.2 (based on the presumption that such a plan qualifies as a PHSP). Thus, insofar as the accounting for the employee’s allocation in a flex plan that has a HCSA, we suggest that you consider the comments in paragraphs 14-18 of IT-529.

Your Question

Can the premiums for life, long-term disability, accidental death and dismemberment be paid for by the employer utilizing the flexible health care spending account funds allocated by the employer without these funds becoming taxable? Are all employees required to participate?

Our views

As discussed above, in order to maintain a HCSA as a PHSP, the plan should only cover qualifying medical expenses. Thus, a HCSA should not be used to pay the employees’ premiums for life, long-term disability, accidental death and dismemberment. These types of benefits may be offered through a flexible employee benefit plan, but such a plan must be organized so that each of the various benefits is segregated and thus can be treated separately for income tax purposes. For general examples of commonly implemented flex plans that do this, we refer you to paragraphs 1 and 2 of IT-529.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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