27 July 1998 External T.I. 9813475 - HEALTH SPENDING ACCOUNT WITH 24 MO PLAN YEAR

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: whether a health spending account with a 24 month plan year has sufficient risk to be considered a phsp

Position: provided that expenses incurred before or after the plan year cannot be claimed against credits incurred in the plan year, the plan effectively has a carryforward of 12 months for credits and no carryforward of expenses - in such a case, it will be considered an insured plan

Reasons:

XXXXXXXXXX 981347
A. Humenuk

Attention: XXXXXXXXXX

July 27, 1998

Dear Sir:

Re: Private Health Services Plan

This is in reply to your letter of May 1, 1998, as modified by your letter of July 22, 1998, concerning a health care plan under which an employer has agreed to reimburse its employees for their medical expenses within the limits set out in the plan.

As discussed with you by telephone on July 10, 1998 (XXXXXXXXXX/Humenuk), the confirmation of the tax consequences relating to a specific transaction is only given by way of an advance income tax ruling, as described in the enclosed Information Circular 70-6R3, Advance Income Tax Rulings, dated December 30, 1996, and is restricted to proposed transactions. If you require assistance in determining the tax consequences of a plan already in existence, you should submit all the relevant plan documentation to the appropriate tax services office for their consideration. Nevertheless, we offer the following general comments which may be of assistance to you.

In your May letter, you describe a self-insured plan which uses a 24 month period as its “plan year,” and ask us whether such a plan contains sufficient risk to be considered a private health services plan. With respect to a self-insured health care plan, or health spending account, a plan year is the basic period of time for which coverage is provided to employees as determined by credits which are allocated to the plan before the beginning of the plan year.

Based on our conversation of July 10, 1998, it is our understanding that employees are allocated credits at the beginning of each 24 month period and are entitled to be reimbursed for any medical expenses, as defined in the plan, up to the limit of the credits so allocated. If any credits are remaining at the end of the 24 month period, they are forfeited. Expenses incurred before or after the 24 month period cannot be claimed against the credits allocated for that particular plan year.

The enclosed Interpretation Bulletin IT-339R2, Meaning of “Private Health Services Plan,” outlines the Department’s position with respect to private health services plans. Paragraphs 14 to 16 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs, provide further assistance with respect to plans which are not insured through an insurance company.

A health spending account as described in IT-529, will qualify as a private health services plan provided that the carry forward provision applicable to the plan, if any, is restricted to either expenses or credits and does not exceed 12 months. In a health spending account, credits allocated to a particular employee set terms on the dollar limit of the liability being insured. Such credits must be allocated before the beginning of the plan year, regardless of the length of the plan year. In a plan which uses a 24 month period as its plan year, credits are effectively carried forward for 12 months from the end of a traditional plan year of 12 months, by reason of the longer plan year. Provided that expenses incurred before or after the plan year cannot be claimed against the credits allocated for the plan year (i.e. the plan does not permit a carry forward of both credits and expenses), a health spending account such as that described in your letter, with a 24 month plan year, would contain sufficient element of risk to be considered an insured plan. Assuming that the expenses covered by such a plan are limited to hospital and medical expenses, the plan would be considered a private health services plan.

With respect to the plan’s administrative requirements concerning the time within which an employee must submit a claim for reimbursement, it is our view that such requirements do not normally affect the status of the plan as a private health services plan.

We trust that these comments will be of assistance. However, as noted above, this is not an advance income tax ruling, and is therefore not binding on the Department with respect to any particular plan.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosure