25 November 1993 External T.I. 9322545 F - Health Spending Account Carryforwards

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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Health Care Spending Accounts

We are replying to your letter of August 10, 1993 concerning health care spending accounts. We apologize for the delay in responding.

In your letter you ask us to reconsider our position as set out in our July 14, 1993 letter concerning the issue of carryforward provisions in a health care spending account. To this end, you make reference to a previous letter sent by this Division on June 10, 1991 in which reference was made to the carryforward of unused credits to "future years".

While the term "health care spending account" is not defined in the Income Tax Act (the Act), we understand it to be a plan, however structured, whereby an employee can request a reimbursement of eligible medical expenses incurred by the employee up to the amount of predetermined credits available in the plan. Such a plan typically forms part of a flexible benefit plan under which several benefits can be "purchased" with credits allocated to the employee by the employer.

We regret any misunderstanding which may have arisen as a result of the comments made in our letter of June 10, 1991. As stated in that letter, a health care spending account must involve a reasonable degree of risk which is assumed by the employer in order to qualify as a private health services plan (PHSP). While it is a question of fact as to what constitutes a reasonable transfer of risk, we have not reviewed any plan where a carryforward in excess of 12 months constituted a reasonable transfer of risk.

While any carryforward period undoubtedly reduces the amount of risk transferred, it is our view that a plan which permits the carryforward of either credits or eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely by reason of the carryforward provision in the plan. A plan which has a carryforward period in excess of 12 months however, typically ceases to be a plan of insurance with a reasonable degree of risk and becomes, in effect, a savings plan for the payment of medical expenses. Consequently such a plan would not qualify as a PHSP within the meaning of that term as defined in subsection 248(1) of the Act.

We trust these comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch