7 July 1991 Income Tax Severed Letter - Flexible Employee Benefit Arrangements

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.

CORPORATE MANAGEMENT TAX CONFERENCE
TORONTO
JUNE 20, 1991

FLEXIBLE EMPLOYEE BENEFIT ARRANGEMENTS

Speakers: B.W. Dath Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch Revenue Canada Taxation and P D Fuoco Section Chief Personal and General Section Rulings Directorate Legislative and Intergovernmental Affairs Branch Revenue Canada Taxation

INTRODUCTION

Thank you very much. As you know my talk today is on flexible benefit plans. I will be looking at the general principles and some of the arrangements that are often found in plans. These include Salary Deferral Arrangements, Retirement Compensation Arrangements, Employee Benefit Plans and Private Health Services Plans. I will also touch briefly on Health and Welfare Trusts. In addition Paul Fuoco has brought along a number of generally asked questions that he will run through them at the end of my paper. I regret that we were unable to provide you with a copy of the paper in advance. However it will be in the published report in both official languages.

During the past decade, there has been a significant increase in the popularity of flexible employee benefit arrangements. These are usually referred to as "cafeteria" plans. Cafeteria plans are not defined in the Income Tax Act or in Departmental publications. We will likely publish an advance tax ruling on the subject in the ATR series in the near future. Judging from the variety and number of enquiries that we have received some aspects of these plans require clarification. In this paper, I will canvass the law, and Department policies and administrative positions, relevant to typical plans and arrangements. An analysis of the commercial reasons for the popularity of cafeteria plans is beyond the scope of this paper. My understanding is that the principal reason for these plans is so that employees can choose the benefits that are of the most value to them. For example an employee with several young children may find a dental plan essential whereas a single employee may have different needs. Suffice it to say that the Department recognises that most cafeteria plans are implemented for sound commercial reasons.

While commercial reasons may abound, it is clear that income tax considerations are also prominent in the design of plans. Perhaps the most common tax reason for implementing a plan is that there are several types of personal expenses of employees which can be paid by an employer and not considered to be a taxable benefit to the employee. If, instead of receiving a non-taxable benefit, an employee receives the amount as salary or wages and pays the expense personally, he or she may be unable to deduct the expense for tax purposes or may be severely restricted in the amount of the deduction. An example of this would be the premiums for a wage loss replacement plan. Other types of plans providing non-taxable benefits that may be found in a cafeteria plan include, a private health services coverage, term life insurance, accidental death and dismemberment insurance, retirement planning advice, and certain employee counselling services.

Although the design of cafeteria plans varies from plan to plan, they all have two things in common: an input side and a benefit option side. That input side sometimes has only one component; the allocation by an employer of credits for each employee. In more complex plans, there are often several components including employee contributions through payroll deductions and credits generated by employees forgoing rights to other amounts: for example, salary, bonuses and vacation leave.

CAFETERIA PLANS

A typical plan is often structured as follows:

* Annually, prior to the commencement of a benefit program year, an employer gives each employee a fixed amount of credits in the plan.

These are usually called flex credits.

* Employees elect to use these flex credits to request or "purchase" benefits which suit their needs. Once an election is made, it is irrevocable.

* Where an employee elects to utilize less than all of the credits allocated to the provision of benefits, he or she may elect to receive the excess during the benefit year in cash.

This ability of an employee to receive the allocated credits in cash has raised the question as to whether the availability of such an option would automatically make the allocation of all flex credits taxable. I'm happy to inform you that this is not the case. The employee with the children can still receive the benefit of a non taxable dental plan notwithstanding that the single fellow in the next office choose to take his allocation in cash.

Input Side

Where the only component on the input side of a cafeteria plan is the contribution by an employer of a fixed amount in respect of each employee, such contributions, in and by themselves, generally have no adverse tax consequences. Such plans usually have a small percentage based on salary as the required input.

However, where employees can choose to forego amounts that they are otherwise entitled to receive in order to increase the amount of credits under a flex plan the Department considers that any such additional credits are taxable under section 5 of the Income Tax Act at the time that they are credited. In this situation we are generally dealing with items; such as, salary bonuses or other increases in remuneration, or vacation or other leave credits.

Some plans permit employees to make cash withdrawals of unused amounts during the year. An example is where an employee anticipates that his dollar entitlement under a medical expense plan will not be completely utilized for medical expenses in the year and has the option to change his coverage and request a cash refund. It is the Department's view that subsection 5(1) applies to all credits made to the plan in the year that are capable of being withdrawn in cash regardless of whether they are actually withdrawn. The difference here from the typical plan that I mentioned a few minutes ago is that in this case the election that the employee makes at the start of the year is recoverable.

Benefit Option Side

The benefit option side can usually be subdivided into several smaller plans or arrangements from which employees choose benefits (e.g., a health care plan, disability insurance plan, provision of an automobile, etc.). To analyze the tax implications of the benefit option side it is necessary to examine each plan or arrangement under the main plan.

Just as a general comment, the taxability of a benefit is not altered by the fact that it is provided under the umbrella of a cafeteria plan. For example, if a plan has a low- or no-interest mortgage feature, such a benefit will be taxable to the extent that it would have been included in the employee's income if it was offered outside the cafeteria plan.

I would now like to review some of the statutory benefit plan rules contained in the Act that may have relevance in determining appropriate tax implications.

STATUTORY RULES

Salary Deferral Arrangements

The first thing to be considered is whether or not a plan or arrangement under a cafeteria plan is a "salary deferral arrangement". The SDA rules, which were introduced during the May 23, 1985 Budget, prevent tax deferral through the use of employee benefit plans. The pre 85 plans were primarily through employers who were not concerned with expense deductions; for example, non-taxable or not-for-profit employers. SDA's are defined in subsection 248(1) of the Act. Briefly stated, an SDA is:

* a plan or arrangement (whether it is funded or not),

* between an employer and,

* an employee who has a right to receive an amount under the arrangement, and

* one of the main purposes for the creation or existence of the right is to postpone the tax payable under the Act by the employee in respect of salary or wages for services rendered in the year or a preceding year.

It is important to note that the "right" mentioned in the definition includes any right that is subject to one or more conditions, unless there is a substantial risk that any one of those conditions will not be satisfied. In other words you can't avoid the SDA rules by making the employee's right to the funds subject to some unlikely condition.

However if part of a cafeteria plan meets the general definition for an SDA, then the list of statutory exceptions must be examined. Those which are the most relevant include:

• 1. disability or income maintenance insurance plans under a policy of insurance with an insurance corporation,
• 2. group sickness or accident insurance plans, and
• 3. certain employer education and training plans.

If a plan is an SDA, the definition of "deferred amount" comes into play. A deferred amount means the amount at the end of the year that the employee has a right to receive in the future. At the end of the year, all deferred amounts under the SDA must be included in the income of the employee as employment income.

Retirement Compensation Arrangements

If a plan or arrangement passes the SDA tests, it is then appropriate to consider whether or not the "retirement compensation arrangement" rules apply. These rules were introduced on October 8, 1986 and prevent tax deferral on unregistered retirement savings plans that would escape the SDA rules.

An RCA is defined in subsection 248(1) of the Act. Briefly it is:

* an arrangement or plan under which an employer makes a payment to a custodian

• • in respect of benefits for the employee - on, after, or in contemplation of the employee's retirement, loss of office or substantial change in services rendered.

An employer can deduct payments to the custodian, but the RCA is subject to a 50% refundable tax on contributions and income. Payments to employees out of an RCA are taxable as income from other sources (not as employment income).

It should be noted that any payments made to a third party or custodian, including payments under an insurance contract can invoke the RCA rules. If a plan or arrangement under a cafeteria plan meets the general tests for an RCA there are some statutory exclusions that may provide relief. Exclusions which are common to cafeteria plans are:

disability or income maintenance insurance plans under a policy of insurance with an insurance corporation, and group sickness or accident insurance plans

Employee Benefit Plans

The next step is to look at the employee benefit plan rules.

During the late 1970's, a number of employers instituted non-statutory employee benefit plans. Through these structures employers could obtain a current tax deduction for payments made to a third party while the employees, on whose behalf the payments were made, could defer paying tax on the amounts until they were received. In 1979, the Minister of Finance announced that changes would be made to the Act to remove the tax advantages arising out of an employee benefit plan ("EBP").

Under the EBP rules, employers cannot deduct contributions to a plan until such time as the employee brings the amount into income.

All amounts received by an employee out of an EBP (other than a return of employee contributions) are taxable as employment income in the year of receipt.

An EBP is also defined in subsection 248(1) and occurs where there is:

* an arrangement,

* a custodian,

* an employer,

* an employee, and

* a payment made to the custodian by the employer for the benefit of the employee.

It can readily be seen that virtually all funded, employee benefit plans (including payments by an employer under an insurance policy) could meet these tests. Hence it is important that each plan or arrangement under a cafeteria plan fit squarely within one of the statutory exclusions contained in the definition if the EBP rules are to be avoided. The exclusions which are common to cafeteria plans are:

• 1. private health services plans,
• 2. group term life insurance policies and,
• 3. group sickness or accident insurance plans,

Failure to be excluded from the EBP rules can result in adverse tax consequences where the intention is to provide non-taxable benefits to employees. For example, if payments are made to a funded, supplementary health care plan that does not squarely fit the definition of a "private health services plan", not only is the time of the deduction to the employer affected, but all payments to the employees out of the trust become taxable.

Private Health Services Plans

Most cafeteria plans that we encounter contain a limited medical expense plan that is intended to be a private health services plan. Generally these are for small amounts of coverage, $500 or $1000 a year, and sometimes appear to be a place to allocate the leftover credits. A "private health services plan" ("PHSP"), is defined in the Act as:

• a) a contract of insurance in respect of hospital and/or medical expenses, or
• b) a medical and/or hospital care insurance plan.

The difficulties that we encounter with some plans generally centre around the coverage provided or the lack of an insurance element. A contract of insurance with a third party insurer obviously meets the insurance element requirement; however, in the main it is the self-insured arrangements we see that present the greatest challenge in determining an insurance element. A detailed discussion of the meaning of a private health services plan is contained in Interpretation Bulletin IT-339R2. As indicated in paragraph 3 of the bulletin, to be a "contract of insurance" or a "medical care insurance plan" a PHSP must contain the following basic elements:

• (a) an undertaking of one person,
• (b) to indemnify another person,
• (c) for an agreed consideration,
• (d) from a loss or liability in respect of an event,
• (e) the happening of which is uncertain.

These criteria are based on the decision of Mr. Justice Pennell in Re Bendix Automotive Ltd. v. U.A.W., Local 195 (1971), 20 D.L.R. (3d) 151 (Ont. H.C.). This case involved a question of whether or not a clause in a collective agreement was a "contract of insurance" and therefore void pursuant a prohibition contained in section 25(1) in the then new Health Services Insurance Act in Ontario.

It is also useful to look at the decision of the Federal Court of Appeal in the case of Consolidated-Bathurst Limited v. Her Majesty The Queen, [[1987] 1 C.T.C. 55] 87 DTC 5001, at 5006, where the court held that

"... insurance involves risk shifting and risk distributing."

This view is shared by Brown and Menezes in Insurance Law in Canada, at p. 1, wherein it is stated that:

"Indemnity insurance is a mechanism for the distribution of the financial burden of an actual loss among a wide group of persons who potentially run the risk of personally incurring similar loss. The members of this group (the insureds) pay premiums to an intermediary (an insurer) who provides indemnity for those relatively few clients who actually suffer injury or damage. Fundamental to this mechanism from a legal perspective is the insurance contract - the agreement whereby the insured transfers the burden of potential loss to the insurer."

Paragraphs 6 and 7 of the Interpretation Bulletin elaborate on the Department's position on self-insured plans in cases both where the health care coverage is provided by the employer through a third party under a "cost plus" contract and where the coverage is provided directly by the employer.

Each plan or arrangement that purports to be a PHSP is tested to ensure that the plan involves a reasonable degree of risk which is being transferred to the insurer (generally, the employer).

One example of what the Department views as the transfer of a reasonable degree of risk may be found in Advance Income Tax Ruling ATR-23, published on July 14, 1987. In this plan, employees were reimbursed for 80% of the cost of medical expenses up to a maximum of $500 per year. At the end of each benefit year, expenses that exceeded $500 in the year could be carried forward to the next benefit year. Unused amounts in the plan a the end of a year were forfeited.

On the other hand, the Department considered that there was not a reasonable element of insurance where a health care plan used a two-year policy period, permitted the carry forward of unused medical expenses from year to year, and also permitted the carry forward of unused credits in the plan until expenses were incurred. Such a plan would therefor be considered to be an employee benefit plan.

Coverage must only be in respect of "medical expenses" as defined in subsection 118.2(2) of the Act. Where a plan or arrangement covers expenses in addition to medical expenses, the plan does not qualify as a PHSP but instead will be treated as an employee benefit plan. In this situation we generally suggest that the plan be split into two plans. This may be done under the same plan umbrella if the employer identifies the portion of each contribution that relates to medical expenses and the portion that relates to other expenses and also the income and disbursements of each plan are accounted for separately. Only the plan that covers non-medical expenses will be considered to be an EBP in this situation.

We are often asked whether an arrangement between a corporation and its shareholder/employee(s) could constitute a PHSP. It may meet the definition, however there is no provision in the Act that excludes a benefit under a plan from a shareholder's income. It is of course always a question as to whether an individual receives a benefit as a shareholder or as an employee. In cases where a health care plan is established for the benefit of a corporation's shareholder/employees only, there is a presumption that coverage is received by virtue of each individual's shareholdings rather than by virtue of each individual's shareholdings rather than by virtue of his or her employment. As a consequence, the exclusion for benefits under a PHSP contained in subsection 6(1) of the Act would not apply and the individual would be considered to be in receipt of a benefit taxable under subsection 15(1) of the Act. It follows that payments made on the shareholder's behalf by the corporation are not deductible in computing income of the corporation.

ADMINISTRATIVE RULES
Health and Welfare Trusts

Many employers have established health and welfare trusts as the funding vehicles for their health care plans. One advantage of utilizing a health and welfare trust is that the Department permits a deduction to the employer when contributions are made to the trust rather than when benefits are provided to the employee. A contribution to a trust does not normally generate a deduction. Of course there are limits, amounts that would not provide an immediate deduction if paid directly by the employer will not be immediately deductible simply because they are paid through a health and welfare trust. An insurance premium for multi year coverage is an example. Subsection 18(9) applies to amortize the payment in either case.

Since H&W Trusts are not defined in the Income Tax Act, one must look to various Departmental publications for the rules governing such arrangements to determine whether the funding vehicle for a plan qualifies as a H & W Trust.

These rules were first published in August, 1966 in Interpretation Bulletin No. 31 entitled "Health and Welfare Trusts for Employees". The current rules governing these types of trusts are contained in Interpretation Bulletin IT-85R2, dated July 31, 1986.

As stated in paragraph 1 of the Bulletin, in order to qualify as a H & W Trust the benefit programs funded through the trust must be restricted to one or more of the following plan:

• a) a private health services plan
• b) a group sickness or accident insurance plan, and/or
• c) a group term life insurance policy.

Paragraph 6 of the bulletin states that

"To qualify as a health and welfare trust the funds of the trust cannot revert to the employer or be used for any purpose, other than providing health and welfare benefits for which the contributions are made."

Payments owing to the trust must be enforceable by the trustees. The type of arrangement envisaged in one where the trustees act independently of the employer. Where the independence of the trustees would be in question it is the Department's view that such an arrangement would not qualify as a H & W Trust. This could be the case for example where the majority of trustees are appointed by the employer and the employer acts as the administrator of the trust.

QUESTIONS AND ANSWERS

Now I would just like to run through a few of the frequently asked questions that we receive in relation to Health and Welfare Trusts

Actuarial Determinations

We are often asked if it is necessary for contributions to a H & W Trust to be actuarially determined where the trust is providing self insured coverage.

Answer

An employer's contributions to the fund must not exceed the amounts required to provide the benefits. Therefore it is necessary to be able to somehow support the amount of the contribution. This can be done through the use of a professional actuary. Any excess contributions will not be deductible.

Contingency Reserves

We have been asked whether in a situation where a multi-employer Trust experiences yearly fluctuations in claims due to employment conditions in a particular industry, if it is permissable for the trust to establish a contingency reserve of, say 25%, to guard against this event.

Answer

As I just mentioned contributions to a H & W Trust must be based on sound actuarial principles. Accordingly, the establishment of an arbitrary "contingency" reserve in the trust would disqualify it.

Split-dollar Arrangements

The types of coverage provided through a health and welfare trust is a frequent question. One proposal was for a Trust of a closely-held corporation to purchase "split-dollar" life insurance policies on key employees insured under the trust.

Answer

There are only three types of insurance coverage that the Department accepts for inclusion in a trust; i.e., a private health services plan, a sickness or accident insurance plan, or a group term life insurance plan. A split dollar life insurance policy is not any of these. Therefore the purchase of such coverage would put the trust offside. I should mention that an employer is not entitled to a deduction for premiums paid to purchase a split dollar policy.

Transfer of Surplus to Registered Pension Plan

We have seen a number of proposals in situations where a H ^ W Trust has a surplus. One common proposal is to transfer some of the surplus to a registered pension plan covering the same group of employees.

Answer

The transfer of surplus funds to a registered pension plan is not an acceptable use of the funds in the trust. As stated in paragraph 6 of the bulletin, in order to qualify as a H & W Trust, the funds of the trust may not be used for any purpose other than providing health and welfare benefits for which the contributions were made. In this scenario it is usually appropriate to discontinue contributions until the surplus is used up.

Investments

We have had a number of discussions over the types of investments that a H & W Trust can make?

Answer

In accordance with the principle in paragraph 6 of the bulletin that the trust funds cannot revert to the employer or be used for any purpose other than providing qualifying benefits, the trust may not invest any funds in any debt obligations of the employer or related persons nor in any property that may be used directly or indirectly by the employer or a related person. Accordingly, the Department will insist that a clause (similar to the following) restricting the types of investments be included in the trust document:

"No property of the trust, whether such property is acquired from the capital or income of the trust, shall be invested in the shares, notes, bonds, debentures or similar indebtedness issued by:

• (a) the company,
• (b) a person who does not deal at arm's length with the company, or
• (c) a person who is a member of a group of persons not dealing at arm's length with the company,

nor shall any such property of the trust be invested in property which is or will be used directly or indirectly, solely or otherwise, by the company or any person who does not deal at arm's length with the company or who is a member of a group of persons not dealing at arm's length with the company. For the purposes of this agreement, a group of persons is deemed not to be dealing at arm's length with the company if the persons in the group are related (within the meaning of the Income Tax Act) and collectively, they control the company."

Now Paul Fuoco is going to deal with some frequently asked questions on private health services plans and cafeteria plans.

Thank you very much Bryan.

As Bryan mentioned, I am going to deal with some of the questions on private health services plans and cafeteria plans; however, before I do, I would like to raise some points on these two types of plans that other speakers here have probably covered but are worth repeating.

I think its important to keep in mind that contributions to a private health services plan are deductible to the employer; such contributions do not give rise to a taxable benefit in the hands of the employees; and benefits paid out under the plan to the employee are also non-taxable.

I would also like to summarize the structure of a cafeteria plan (or flexible benefit plan). Such plans can be as simple as an arrangement having only one benefit plan provided under the plan; however, the more common type of set-up is an arrangement which has an umbrella plan to which the employer allocates credits for each employee. Under the umbrella plan there are various benefit plans. The employee then has the flexibility of choosing which plans under the umbrella plan he or she would like credits allocated.

I would like to begin with questions dealing with private health services plans.

The first question relates to the types of medical expenses covered by a private health services plan.

PRIVATE HEALTH SERVICES PLANS

Meaning of Medical Expense

Would a health care plan that contained a provision for the reimbursement of expenses for the purchase of an air conditioner for an employee who suffers from a respiratory ailment qualify as a private health services plan?

Answer No. The payment of such expenses by a health care plan would disqualify the plan as a PHSP. As specified in IT-339R2, coverage under a private health services plan must be in respect of expenses which would otherwise qualify as medical expenses described in subsection 118.2(2) of the Income Tax Act and Regulation 5700 of the Act. Paragraph (b) of that regulation specifically excludes the cost of an air conditioner as a medical expense.

Coverage for selected employees

Can a health plan qualify as a PHSP if it provides coverage for a select group of employees?

Answer

Where a PHSP is self-insured (i.e., the consideration for the "insurance" is regarded as the employees' covenants in their contract of service with the employer), it is the Department's view that the plan should cover all employees (or all employees within a specific category) in one plan with the same coverage for each employee.

Where shareholder/employee are provided with enhanced coverage under a plan, or where a separate plan is established for such employees, it is a question of fact as to whether their benefits under that plan are by virtue of being employed or being a shareholder.

Rollover of Unused Credits in a PHSP

Is it permissible for unused credits in a health care plan established under a cafeteria plan to be rolled over to future years?

Answer

Yes. However, in order for the health care plan to qualify as a PHSP, the plan must involve a reasonable element of risk which is assumed by the employer. Plans which permit the choice of a rollover or cash-out of unused credits would not qualify as a PHSP. A plan that permits the rollover of unused expenses as well as credits would also likely not qualify. Plans which permit the rollover of unused credits to be applied to other plans under a cafeteria plan are not considered to be a PHSP.

Bonus Arrangements

In order to reward individuals with favourable claims experience under a PHSP, is it permissible to distribute a cash bonus to such employees after the end of the plan benefit year based on a formula.

Answer

A bonus arrangement of this nature would likely violate the indemnity principle which is fundamental to a contract of insurance with the result that the plan in question would not qualify as a PHSP.

Cafeteria Plans

Structure

Is it necessary to have a formal plan document?

Answer

While there is no special format required for a flexible benefit plan, there should be some formal structure to the arrangement. If a bona fide plan exists, its terms and conditions and benefits available under it should be made known to the qualifying employees and such employees should have legal access to coverage and benefits under the plan.

Vacation Buying

Are employees permitted to purchase additional vacation days with credits in their cafeteria plans?

Answer

Yes, provided the leave is taken in the year of purchase. However, if the plan permits the rollover or cash out of purchased vacation leave, it may be a salary deferral arrangement.

Directed Contributions to RRSP, etc.

What are the tax consequences where an employee directs credits in a cafeteria plan to be paid to an RRSP or other type of savings plan?

Answer

To the extent that an employee uses or directs credits under a cafeteria plan to be contributed to a plan such as an RRSP, such amounts are taxable to the employee under subsection 5(1) of the Act. Of course, the employee would be entitled to a deduction to the extent permitted under the RRSP rules.

Cashing Out of Unused Credits

What is the Department's position concerning a cafeteria plan under which an employer provides a "maximum" level of credits for each employee, say $4,000, and it is evident that each employee's salary or wages was reduced by a similar amount?

Answer

Taxable benefits such as salary or the right to a salary increase may not be converted to non taxable benefits. Employees who choose to receive cash out of the plan will be taxed as they receive it and employees who choose health care benefits would be taxable when the coverage becomes available to them.

Vacation Selling

Are employees permitted to sell existing vacation days in exchange for credits in a plan or arrangement under a cafeteria plan?

Answer

Yes. However, the amount credited to the plan is taxable in the year of sale pursuant to subsection 5(1) of the Act. We have had strong representatives made by an employee benefits consulting firm on this point. The Department considers that an employee's entitlement to vacation each year is a right which has value to that employee. Even in a situation where the employee must forfeit his or her vacation entitlement at the end of the year if not taken, the entitlement still has value if the employee can convert that entitlement to flex credits. We see no difference, from an income tax perspective, between "cashing out" vacation entitlement and converting vacation entitlement to something of value to the employee such as credits in a flexible benefit plan.

Conversion of Salary or Wages into Credits

Can an employee forgo an amount of salary or wages and elect to take an equivalent credit in his/her flex account under a cafeteria plan?

Answer

Yes. However, the amount of salary or wages foregone is taxable immediately pursuant to subsections 56(2) and 5(1) of the Act.

Transfer of Credits between Plans

After the beginning of a plan benefit year, can an employee elect to transfer credits under one plan (e.g., a PHSP) into another plan (e.g., a registered retirement savings plan)? Answer

No. If a cafeteria plan permits withdrawals or transfers between plans we consider that all benefit credits under the plan are taxable in the year. However, if a change in the employee's family circumstances occurs during the plan year (e.g. he or she marries or has a child) it is permissible for the employee to adjust his or her coverage by re-allocating credits accordingly.

Purchase of Flex Credits

May employees purchase additional flex credits under a cafeteria plan through payroll deductions.

Answer

Yes. However, since such credits are effective purchased with "after-tax" dollars, this may not be advisable in the case of health care expenses.

Dependant Care Plan

What is the tax treatment of a plan under a cafeteria plan which reimburses employees for child care expenses, as defined in section 63 of the Act?

Answer

There is no provision in paragraph 6(1)(a) of the Act which exempts benefits to employees under a child care services plan. Therefore, the credits granted under a cafeteria plan for such purposes would be a taxable benefit to the employee in the year of credit. Expenses paid by the employer under such a plan would be considered to be paid by the employee and deductible under section 63 of the Act provided they otherwise qualify.

Conclusion

During the last half hour or so we have attempted to provide you with the Department's perspective on some of the issues surrounding flexible benefit plans. I hope that we have been successful. Thank you for your attention.