30 November 1995 Ruling 9629843 - XXXXXXXXXX FLEX PLAN RULING

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:

creation of a flex plan

Position:

plan conforms with principles for ensuring that tax treatment under plan is not different from that which would be applied if benefits provided outside a plan

Reasons:

not an ebp, sda or rca.

XXXXXXXXXX		                               962984

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
Flexible Benefit Plan
XXXXXXXXXX

This is in reply to your request for an advance income tax ruling dated XXXXXXXXXX, concerning the proposed flexible benefit program for the employees of XXXXXXXXXX. We acknowledge receipt of additional information and modifications to your request on XXXXXXXXXX.

Facts

XXXXXXXXXX is a corporation resident in Canada which provides financial services to the public both in Canada and outside of Canada.

XXXXXXXXXX currently provides its employees with a benefit package which includes medical, dental, life and accident insurance for employees, their spouses and their dependants as well as survivor benefits. The medical and dental insurance plans which form part of this package are provided through separate health and welfare trusts. In addition, XXXXXXXXXX has a long term disability plan which is fully funded by employee contributions.

The benefit plan currently in place for survivors is called the XXXXXXXXXX but will be renamed the XXXXXXXXXX. The XXXXXXXXXX provides a percentage of base pay to be continued to a deceased employee's spouse or children or both. It also provides for medical, dental, employee assistance plan and XXXXXXXXXX to employees' survivors. The payments made as a percentage of base pay and the medical and dental insurance coverage under the XXXXXXXXXX are insured by a group term life insurance policy as defined in subsection 248(1) of the Act. XXXXXXXXXX absorbs the costs associated with providing the survivors with coverage under the employee assistance plan and XXXXXXXXXX when the services are provided.

Proposed Transactions

XXXXXXXXXX is proposing to implement a flexible benefits program (the "Program") for its employees across Canada. The Program will be effective from XXXXXXXXXX.

The Program will operate on a calendar year basis. Prior to each calendar year, all eligible employees will be provided with a personal report indicating their current benefits and their available choices with the associated dollar values attributed to each benefit for the following calendar year. Enrollment must be completed in advance of the calendar year. The elections made by an employee are irrevocable and may not be changed except in the case of a life event as described in paragraph 6. In the case of a change in employment status, certain changes may be required to accommodate the change in the notional dollar amount, or Flex dollars allocated to the employee as described in paragraph 7.

A life event is defined in the plan documentation as one or more of acquiring or losing a spouse or dependant for any reason including the qualification or disqualification of that person as a spouse or dependant, such as through divorce, separation or adoption, or a change in a spouse's employer-provided benefit coverage. Changes to an election after the beginning of the year in the case of a change in employment status will only be permitted in the case of a transfer to or from expatriate status, going on or off a period of unpaid leave, or a change from full-time to part-time status or vice-versa. In addition, such changes will be limited to those necessary to accommodate the increase or reduction in the number of Flex dollars allocated to the employee.

Upon the occurrence of a life event or employment status change that results in a change of benefit coverage, the allocation of an employee's Flex Dollars and the amount of such Flex Dollars to be credited to the proposed health care spending account (a new health care option - see paragraph 18 below) will be recalculated on a pro rata basis for the remainder of the year.

For the purposes of the Program, the term "spouse" includes "spouse" as defined in paragraph 252(4)(a) of the Act as well as a same-sex partner who has cohabited with the employee for at least one year. For the purposes of all benefit options other than the new health care option described in paragraph 18 below, the term "dependant" will be more restrictive than the definition of "dependant" in subsection 118(6) of the Act and the definition of "child" in subsection 252(1) of the Act. However, it will include any dependant of the employee's same sex partner or any factual dependant who has not been legally adopted by the employee.

The funds needed to purchase the chosen benefits under the Program come from two sources: flexible benefit credits granted to employees by XXXXXXXXXX, referred to in the Program as "Flex Dollars," and payroll deductions. XXXXXXXXXX will provide each employee with Flex Dollars, in order to enable the employee to purchase benefit coverage equal to the employer-paid coverage in place prior to introduction of the Program. The amount of Flex Dollars allocated to an employee and the price tags associated with each benefit are determined actuarially, based upon factors such as the employee's age, coverage category, level of coverage and pay level. Employees may also elect to purchase coverage through payroll deduction.

Under the Program, employees may elect to continue to receive the same level of benefits provided currently or will be able to select other levels of coverage in respect of any of the following benefit choices:

• medical insurance
• dental insurance
• employee life insurance
• dependent life insurance
• employee accident insurance
• dependent accident insurance
• survivors benefits
• long-term disability insurance
• health care expense account described in 18 below.

The Program will offer XXXXXXXXXX options of medical care insurance and XXXXXXXXXX options of dental care insurance. The types of expenses covered by these medical and dental insurance options will be limited to those described in the list of expenses that qualify as medical expenses under subsection 118.2(2) of the Income Tax Act (the Act). In addition, there are four coverage categories in respect of medical and dental insurance: employee only, employee plus dependent children, employee plus spouse, and employee plus spouse and dependent children.

The medical and dental insurance options will be self-insured arrangements under administrative services only ("ASO") contracts with XXXXXXXXXX The health and welfare trusts which administer the existing medical and dental insurance plans will be amended to clarify that XXXXXXXXXX is required to contribute the amount needed to fund the plans as established by the trustees and that no amount is refundable to XXXXXXXXXX in any circumstance.

The Program will offer XXXXXXXXXX options of life insurance for employees and their spouses. The Program also offers XXXXXXXXXX options for life insurance for employees' children. The life insurance plans will be fully insured by a single policy on an experience-rated basis by XXXXXXXXXX.

The premiums to be paid by XXXXXXXXXX to XXXXXXXXXX under the policy for basic coverage for employees will be calculated as an aggregate amount for all employees, at a rate per thousand dollars of coverage. The premiums to be paid by XXXXXXXXXX to XXXXXXXXXX in respect of optional life insurance coverage for employees and spouses will be calculated based on age. A flat rate premium will be set for dependent children. The premium for all coverage under the policy is composed of two elements: a premium in respect of pure claims and a premium in respect of the cost of administering the coverage.

XXXXXXXXXX will perform a reconciliation toward the end of each year in respect of the premiums paid for basic employee life insurance and optional life insurance. The reconciliation will be based upon premium, claims and administration fee information from XXXXXXXXXX. If the reconciliation is performed as of November 30, the remaining month will be prorated based on the reconciliation amount for the first eleven months of the year. The reconciliations in all cases will be calculated as an aggregate amount for all employees, expressed as a flat rate.

With respect to accident insurance, the Program will offer XXXXXXXXXX options for employee coverage, XXXXXXXXXX options for coverage for a spouse and XXXXXXXXXX options for dependent children. The accident insurance plans will be fully insured with XXXXXXXXXX.

Employees who are currently enrolled in the XXXXXXXXXX shall be eligible to continue coverage under the XXXXXXXXXX as part of the Program. The medical and dental coverage and cash payments provided under the XXXXXXXXXX will continue to be funded by a group term life insurance policy with XXXXXXXXXX.

Employees who are not currently enrolled in the XXXXXXXXXX or who opt out of XXXXXXXXXX will be entitled to coverage under a separate plan, entitled the XXXXXXXXXX. The XXXXXXXXXX will provide medical, dental, employee assistance plan and XXXXXXXXXX to employees' survivors. Employees with XXXXXXXXXX or more years of continuous service will not pay for coverage under XXXXXXXXXX with either payroll deductions or Flex dollars. Medical and dental benefits provided under the XXXXXXXXXX will be self-insured pursuant to ASO contracts with XXXXXXXXXX. XXXXXXXXXX will continue to absorb the costs associated with the employee assistance plan and XXXXXXXXXX when the services are provided to survivors under either the XXXXXXXXXX or the XXXXXXXXXX.

The Program will offer four benefit options for long-term disability insurance. The long-term disability benefits will be fully insured on an experience-rated basis with XXXXXXXXXX. The coverage will be funded exclusively by the employees through payroll deduction.

The Program will offer a new benefit option called the health care expense account ("HCEA"). The HCEA will provide payment for eligible medical and dental expenses described in subsection 118.2(2) of the Act not otherwise covered by the applicable provincial health care plan or any other private health services plan, including the plans described in paragraphs 11 and 12 above. The HCEA will cover expenses of the same categories of spouses and same-sex partners as will be covered under the medical and dental insurance plans, as described in paragraph 8 above. "Dependants" for purposes of the HCEA, however, will include all those persons described in the definitions of "dependant" and "child" in subsections 118(6) and 252(1) of the Act as well as any dependant of an employee's same sex partner.

Payments from the HCEA in a particular calendar year will be limited to claims for benefits in that year. There is, however, a 60-day "grace period" which allows for claims arising in a year and submitted for processing within the first 60 days of the next year to be paid from the prior year's HCEA balance. In the event of a life event or employment status change, any balance in the HCEA in respect of the period prior to the change will be forfeited after the expiry of the 60-day grace period.

Any balance at the end of a calendar year may be rolled over to the next calendar year and can be used for the payment of claims in that year. Any remaining balance from those funds at the end of the second calendar year will be forfeited.

Purpose of the Proposed Transactions

XXXXXXXXXX is introducing the Plan because it recognizes that the benefits needs of its employees and their families depend upon their individual circumstances, including such factors as family status, number of dependants, existence of alternate sources of coverage, etc. The purpose of the Program is to provide XXXXXXXXXX employees with the flexibility to tailor-make their benefit coverage, within certain parameters, to best suit their needs.

Other Information

To the best of XXXXXXXXXX knowledge, none of the issues involved in the requested rulings is being considered by an office of Revenue Canada in connection with a tax return already filed, and none of such issues is the subject of any notice of objection or is under appeal.

Advance Income Tax Rulings Given

Provided that the above statements of the facts and the proposed transactions are accurate and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the proposed transactions are executed as proposed herein, we confirm that:

The Program will not be an employee benefit plan, a salary deferral arrangement or a retirement compensation arrangement, within the meaning of subsection 248(1) of the Act.

Benefits provided under the Program to employees will be received or enjoyed by virtue of their employment with XXXXXXXXXX and will only be included in income to the extent provided by section 5 or 6 of the Act.

The HCEA will be a private health services plan, within the meaning of subsection 248(1) of the Act.

The allocation of Flex Dollars by XXXXXXXXXX to an employee will not, in and by itself, be considered remuneration from an office or employment within the meaning of subsection 5(1) of the Act nor as a benefit received within the meaning of paragraph 6(1)(a) of the Act.

The premiums paid by XXXXXXXXXX to the insurance carrier for the purpose of providing benefits under the Program will be deductible in computing XXXXXXXXXX income for tax purposes in the taxation year paid or payable subject to the limitations in paragraph 18(1)(a), subsection 18(9) and section 67 of the Act.

Medical and dental benefits payable in respect of an employee's same-sex partner or a dependant as defined in paragraphs 8 and 18 for the purposes of the Program, under either the regular medical and dental insurance plans or under the HCEA may be paid without jeopardizing the status of the plans as private health services plans, within the meaning of subsection 248(1) of the Act.

The funding of the medical and dental insurance plan and the HCEA through health and welfare trusts, as described in Interpretation Bulletin IT-85R2 will not, in and of itself, affect ruling F.

Payments by XXXXXXXXXX to the insurance carrier as premiums to provide accident insurance coverage under the Program as set out in paragraph 14 above for the employee, the employee's spouse and the employee's dependants as defined in paragraph 8 for the purposes of the Program will be excluded from the income of a participating employee by reason of paragraph 6(1)(a) of the Act.

The life insurance policy under the Program that covers employees, their spouses and dependants in the manner set out in paragraph 13 above, will not constitute a group term life insurance policy as defined in subsection 248(1) of the Act.

The taxable benefit under paragraph 6(1)(a) in respect of both the basic and optional life insurance will be equal to the sum of the premiums paid by XXXXXXXXXX for each type of coverage, the additional amount (if any) due to reconciliation, and the administration charges paid by XXXXXXXXXX, less any experience rating refund received in respect of the policy calculated as a flat rate for all persons covered on the basis of cents per thousand dollars of coverage.

The making of mid-year elections on a prospective basis, upon the occurrence of a life event or employment status change as set out in paragraph 6 above, will not, in and by itself, affect the tax-status of any of the benefit plans under the Program, including the HCEA, and will not confer a taxable benefit upon employees under either section 5 or 6 of the Act.

The provision of medical insurance, dental insurance and employee assistance plan benefits to the survivors of eligible employees under the XXXXXXXXXX will not confer a taxable benefit on such employees under either section 5 or 6 of the Act and will not result in an income inclusion for the survivors under section 56 of the Act.

The provision of XXXXXXXXXX to the survivors of eligible employees under the XXXXXXXXXX will not confer a taxable benefit on such employees under sections 5 or 6 of the Act. The value of the XXXXXXXXXX provided to the survivors will be considered a death benefit within the meaning of subsection 248(1) of the Act.

A benefit under subsection 6(4) of the Act will be included in the income of employees who select coverage under the XXXXXXXXXX, as described in paragraph 15 above, in respect of the premium paid by XXXXXXXXXX each year for such coverage.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by the Department of National Revenue, Taxation and are binding on the department provided that the proposed Program described herein is implemented on or before XXXXXXXXXX.

Yours truly,

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