11 January 1994 External T.I. 9430065 - FLEX BENEFIT PLAN -GENERAL COMMENTS

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:

request for a ruling on a "model plan" for a health spending account

Position TAKEN:

-won't rule on a model plan
-a health care spending account will only qualify as a phsp if the expenses eligible for reimbursement are limited to medical expenses as defined in ss 118.2(2) (if this limitation is not specified tied to the Act, the list of qualifying expenses must be precise enough that a determination can be made
-a health care spending account will only qualify as a phsp if it is a plan of insurance & involves a reasonable degree of risk

Reasons FOR POSITION TAKEN:

-the list of qualifying expenses was somewhat vague, i.e. durable medical equipment and drugs.

-the plan described involved a reasonable degree of risk in that credits unused within 6 months after end of plan year were forfeited

A. Humenuk
XXXXXXXXXX 943006

Attention: XXXXXXXXXX

January 11, 1995

Dear XXXXXXXXXX:

Re: Flexible Benefit Plans

We are replying to your letter of November 15, 1994 in which you ask for a ruling in respect of your client XXXXXXXXXX.

As discussed in our telephone conversation of December 20, 1994 (XXXXXXXXXX\Humenuk), we are unable to give an advance income tax ruling in the case of a "model plan" in which all of the parties to the transaction have not been identified, as is the case with your request. We are, however, willing to offer some limited comments for your general guidance.

In your letter, you outline a plan whereby participating employers contribute a predetermined amount to a plan administrator on behalf of each employee of that employer. The total amount to be contributed by the employer is determined according to criteria established by the employer. However, the employee is entitled to determine on an annual basis but prior to the commencement of the plan year, how the funds will be allocated among various benefit plans offered under the umbrella flexible benefit plan. The annual allocation made by the employee is irrevocable.

One of the benefits to which an employee may choose to allocate funds under the terms of the plan is a health spending account. As you describe it, a health spending account is an arrangement whereby the employer deposits the agreed upon amount plus an administration fee with the plan administrator on behalf of each employee to be held in separate accounts for each employee. The employees are not entitled to the amounts so deposited but are entitled to be reimbursed for eligible medical expenses incurred in the plan year and six months thereafter to the extent of any balance available in the employee's account. The health spending account is intended to supplement rather than replace any medical insurance already available to the employee. Any balance remaining in the employee's account 6 months after the end of a plan year is forfeited by both the employer and the employee. Likewise, any balance in an employee's account is forfeited upon the termination of the individual's employment.

If an employee's health needs in a particular year exceed the amount available in the employee's health spending account, the employee may still be entitled to a reimbursement of the expense subject to a specified deductible amount and a lifetime limit of one million dollars. Such excess coverage is only intended to cover unusually large medical expenses. The employer will reimburse XXXXXXXXXX for any reimbursement made under the excess coverage portion of the plan.

You have asked us to confirm that a health care spending account such as you describe would be a private health services plan as defined in subsection 248(1) of the Income Tax Act (the Act) and that no taxable benefit would accrue to the employee either by reason of the employer's contribution to the plan or the payment of benefits out of the plan.

Where a health care spending account forms part of a larger benefit plan provided by an employer, one must look to the entire plan to determine the tax consequences of any particular component part of that plan. Depending on the nature of the benefits offered under the plan, the manner in which the component parts are segregated and the funding arrangement for the plan, the entire benefit plan may be considered an employee benefit plan, an employee trust or a health and welfare trust.

Where an employer contributes funds into a plan for the benefit of its employees, the plan will be considered an employee benefit plan or an employee trust as defined in subsection 248(1) of the Act unless the plan qualifies as a health and welfare trust as described in Interpretation Bulletin IT-85R2 "Health and Welfare Trusts". Where part of a single plan could be regarded as a health and welfare trust and another part as an employee benefit plan or employee trust, the plan will be treated as an employee benefit plan or employee trust, as the case may be, unless the portion of the plan which would otherwise qualify as a health and welfare trust is accounted for separately from the portion which qualifies as an employee benefit plan as stated in paragraph 4 of IT-85R2.

In the comments which follow, we will assume that the health spending account portion of the plan does not form part of a larger employee benefit plan but constitutes a separate plan.

The Department's position with respect to private health services plans is outlined in Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"". In determining whether a particular plan, including a health care spending account, qualifies as a private health services plan, the Department looks to the type of expenses covered by the plan and whether the plan is a plan of insurance.

In order for a plan to qualify as a private health services plan, the expenses covered by the plan must be restricted to expenses which would normally otherwise have qualified as medical expenses as defined in subsection 118.2(2) of the Act. While it is a question of fact as to whether a particular list of expenses qualify as medical expenses as defined in subsection 118.2(2) of the Act, it is important that any list of eligible expenses be described with sufficient precision of terms to ensure that coverage is not inadvertently extended to non-qualifying amounts. For example, the list of expenses submitted with your request includes

prescription drugs,
prescribed drugs,
generic equivalent to prescription or prescribed drugs and
durable medical equipment.

With respect to the cost of drugs, it is not clear from the listing what distinction is intended between the 3 categories so listed. However, in order for the cost of drugs (other than those listed in paragraph 118.2(2)(k) of the Act) to be considered a medical expense for tax purposes, the drug expense must meet the criteria described in paragraph 118.2(2)(n) of the Act, including the requirement that the purchase be recorded in a pharmaceutical register.

Equipment which is used for medical purposes will only qualify as a medical expense for the purposes of the Act if it is described in one of the paragraphs of subsection 118.2(2) of the Act. Accordingly, depending of the type of equipment which qualifies for reimbursement under the category of "durable medical equipment", a plan such as you describe in your letter may or may not qualify as a private health services plan.

For further information concerning the type of expenses which qualify as medical expenses under subsection 118.2(2) of the Act, please refer to Interpretation Bulletin IT-519 "Medical Expense and Disability Tax Credits".

The above noted comments are an expression of our opinion only and as such, should not be construed as acceptance that the health spending account portion of the flexible benefit plan as described is a private health services plan.

We hope this letter will be of assistance. Your deposit fee will be refunded shortly under separate cover.

Yours truly,

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