13 January 1995 External T.I. 9426075 - HEALTH AND WELFARE TRUSTS AND FLEXIBLE BENEFITS

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:

Clarification of IT-85R2 Health and Welfare Trusts for Employees with respect to a particular situation. Asked for confirmation that the amount in a member's flexible spending account may be used to extend the member's hour bank in the event the hour bank is depleted during a period of unemployment.

Position TAKEN:

Once an employee has elected to allocate flex credits to a particualr account, no changes are permitted to that allocation (except in certain situations where a change in the employee's family status has taken place)

Reasons FOR POSITION TAKEN:

Previous position as outlined in E9212295 and E9314075 as well as position as outlined in the 1991 CMTC speech on Flexible Employee Benefit Arrangements by B.W. Dath and P.D. Fuoco

		942607
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

January 13, 1995

Dear Sirs:

Re: Health and Welfare Trusts
Interpretation Bulletin IT-85R2

We are writing in response to your letter of October 5, 1994 in which you request confirmation of your interpretation of the restrictions listed in paragraph 1 of IT-85R2 with respect to a particular situation.

You have advised us that the plan at issue is a multi-employer Health and Welfare Trust, established pursuant to the provisions of IT-85R2, which provides flexible benefits. More specifically, you ask us to confirm your interpretation that the amount in a member's flexible spending account may be used to extend the member's hour bank in the event the hour bank is depleted during a period of unemployment.

The particular circumstances outlined in your letter on which you have asked for our confirmation appear to involve a factual situation and specific taxpayers. We have enclosed for your information a copy of Information Circular 70-6R2 and the subsequent special release dated September 30, 1992 which set out the guidelines under which advance income tax rulings are issued. As indicated in paragraph 21 of the information circular, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of some assistance to you.

Our Comments

Under a typical flexible benefit plan, an employee will choose, before the beginning of the plan year, how to allocate "flex credits" to the various plans, which may include a Supplemental Health Care Account ("SHCA"), offered under the plan. Under a SHCA, the employee is entitled to be reimbursed for eligible medical expenses to the extent that the employee has allocated flex credits to the plan. We will assume for the purposes of our discussion that the flexible spending account is in fact a SHCA established to cover expenses that are not covered by a standard Private Health Services Plan ("PHSP"), as this term is defined in subsection 248(1) of the Income Tax Act (the "Act"), and that the SHCA also meets this definition. As discussed in paragraph 3 of the enclosed Interpretation Bulletin IT- 339R2, a PHSP must be in the nature of insurance and must contain the following basic elements:

i) an undertaking of one person,

ii) to indemnify another person,

iii) for an agreed consideration,

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

v) the happening of which is uncertain.

Furthermore, as indicated in paragraph 4 of IT-339R2, the coverage under a PHSP must be in respect of hospital care or expense or medical care or expense which normally would otherwise have qualified as a medical expense under the provisions of subsection 118.2(2) of the Act in the determination of the medical expense tax credit.

It should be noted that once an employee has elected to allocate flex credits to a particular account, no changes are permitted to that allocation (except in certain situations where there has been a change in the employee's family status). As stated above, in order for a SHCA to qualify as a PHSP, it must involve a reasonable element of risk. Plans which permit the rollover of unused credits to be applied to other plans under the flexible benefit plan would thus not qualify as a PHSP.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch