1 December 1995 External T.I. 9529955 - GENERAL COMMENTS ON EMPLOYER-ADMINISTERED PHSP

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:

self-administered phsps & the rules relating to c/f, eligible expenses, etc.

Position:

general comments given

Reasons:

a phsp which is comingled with a taxable plan will likely be an ebp

A. Humenuk
XXXXXXXXXX		952995

Attention: XXXXXXXXXX

December 1, 1995

Dear Sirs:

Re: Private Health Services Plan

Your letter of August 28, 1995 to the Sudbury Taxation Centre concerning the administration of private health services plans has been referred to us for reply.

Prior to addressing your specific concerns, we would like to offer a few general comments. The term "private health services plan" is defined in subsection 248(1) of the Income Tax Act (the Act) and is relevant for the purpose of determining whether the related premiums paid by an individual in respect of a plan qualify as a medical expense for the purpose of the medical expense tax credit and for the purpose of determining whether the benefit derived by an employee from an employer's contribution to such a plan is taxable.

There are no registration procedures involved in setting up a private health services plan. If a particular plan falls within the definition of a private health services plan as explained in the attached Interpretation Bulletin IT-339R2 "Meaning of "Private Health Services Plan"", then any contributions by the employer to such a plan will not result in a taxable benefit to the employees in respect of whom the contributions have been made. If the plan does not qualify as a private health services plan, then the plan will likely be an employee benefit plan or an employee trust as described in the attached Interpretation Bulletin IT-502 "Employee Benefit Plans and Employee Trusts" and the employee will be taxed on the benefit derived from the plan. However, the rules which govern a plan are determined by the plan documentation. Where a plan is set up by an employer, the employer would be in a position to make the rules concerning the terms and conditions, including carryforward provisions, under which an employee's expenses would be covered by the plan.

Your remaining questions can be summarized as follows:

What expenses are eligible for coverage under a private health services plan?

Coverage under a private health services plan is limited to medical expenses as defined in subsection 118.2(2) of the Act and described in paragraphs 21 - 68 of the attached Interpretation Bulletin IT-519R "Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction".

What carryforward options are permitted under a private health services plan?

In order for a particular plan to qualify as a private health services plan, the plan must involve a reasonable element of risk which is assumed by the employer. If the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a private health services plan. While a carry forward period undoubtedly reduces the risk of loss to the employee, it is our view that a plan which permits the carry forward of either the unused allocation or of eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a private health services plan solely by reason of the carry forward provision in the plan.

Another question we are often asked is whether a plan can permit some employees to carry forward credits while others carry forward expenses and also whether it is permissible for an employee to carry forward expenses in one year and credits in the following year. As stated above, it is our view that a plan which permits the rollover of unused expenses as well as credits does not have a sufficient degree of risk to qualify as a private health services plan. Thus, a plan which permits some employees to carry forward credits and others to carry forward expenses would not qualify as a private health services plan.

If an employee incurs less eligible expenses than the annual maximum limit permitted under the plan, can the employee withdraw the excess in cash or can such excess be transferred to the employee's RRSP? What are the tax implications of such a withdrawal?

A plan which permits either the cash-out or rollover of unused credits to other plans offered by the employer, either separately or under the umbrella of a flexible benefit plan, does not qualify as a private health services plan. Where a plan or arrangement provides for the payment of a benefit other than the reimbursement of medical expenses (as in your example where amounts can be withdrawn or used to make contributions to an RRSP), the plan will not qualify as a private health services plan but instead may be treated as an employee benefit plan. Thus, all payments out of a plan which permits a cash withdrawal (whether or not the amount is contributed to an RRSP) will be included in the employee's income even though some payments may be in respect of eligible medical expenses.

These comments should not be confused with our position with respect to flexible benefit plans. Under a flexible benefit plan, employees make choices prior to the beginning of the plan year as to which benefits will be provided by the employer up to a specified amount set by the employer. The fact that some employees may choose to receive cash or to have amounts deposited to an RRSP does not affect the status of other benefit plans, including a private health services plan, which the employee may select as his or her choice.

If one of the benefit choices is that the employer will contribute to an RRSP on behalf of the employee, the amount of the contribution is included in the employee's income and the employee is entitled to a deduction for the contribution to the RRSP to the extent otherwise permitted under the Act.

Are benefits received by an employee under a private health services plan non-taxable?

The benefit derived by an employee from an employer's contribution to a private health services plan is excluded from income by reason of paragraph 6(1)(a) of the Act.

At what point in time is the employer entitled to a deduction for contributions made to the plan?

Provided that the private health services plan does not form part of a larger plan which is an employee benefit plan, the employer will be entitled to a deduction for contributions made to the private health services plan at the time that the actual contribution is paid or becomes payable, depending on the method used by the employer. Where the employer is administering the plan directly and reimburses the eligible expense to the employee upon the submission of the appropriate receipt, the employer will not be entitled to a deduction prior to the submission of the employee's claim.

Can the employer be directly responsible for adjudicating and paying claims? How does an employer account for claims under a private health services plan so as to distinguish such payments from regular salary paid to an employee?

As stated in paragraph 7 of IT-339R2, an arrangement where an employer is obligated to reimburse its employees for medical or hospital expenses may come within the definition of a private health services plan where the employer is obligated by the employment contract to pay for such expenses. While the employer may be directly responsible for adjudicating and paying the claims under the plan, the employee's rights under the plan must be clearly defined in the documentation relating to the plan. While we do not provide advice as to how the employer is to set up the books and records of the business, we agree that the employer should account for payments out of the plan separately from payments of salary and wages.

We trust our comments will be of assistance to you.

Yours truly,

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

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