19 January 2005 External T.I. 2003-0030991E5 - PHSP - Cost Plus Plan

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.

SUBJECT: PHSP - Cost Plus Plan

Principal Issues: Whether our position has changed to permit "cost plus" plans, as described in IT-339R2, to qualify as a PHSP where the plan has no element of insurance.

Position: No

Reasons: Legislation.

XXXXXXXXXX 2003-003099
Shaun Harkin, CMA
January 19, 2005

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: "Cost Plus" Benefit Plans

We are writing in reply to your letter of July 21, 2003, wherein you asked whether our position has changed to permit cost plus plans, as described in Interpretation Bulletin IT-339R2, Meaning of "private health services plan", to qualify as a private health services plan ("PHSP") where the plan has no element of insurance. We apologize for our delay in responding, which, as you are aware, was due to our consultations with other government departments.

One of your concerns is with cost plus plans that have added "stop loss protection", where claims are limited to a maximum dollar value beyond which they would be covered by another insurance plan. In your view, these types of cost plus plans do not meet the requirement described in paragraph 3(e) of IT-339R2.

Our Comments

According to paragraph 3 of IT-339R2, it remains our position that a PHSP must be in the nature of insurance. In this regard, the plan must contain the following basic elements:

(a) an undertaking by 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 elements relate to the relationship between the individual insured and the insurer. In a cost plus arrangement, it is the employer (not the administrator) who insures the employees. As discussed in paragraph 6 of IT-339R2, it remains our long-standing position that a cost plus plan could contain the basic elements of insurance and qualify as a PHSP. In regards to element (e) above, in a cost plus PHSP the employer is uncertain as to the amount of claims the employees will submit.

In order for a particular plan or arrangement to qualify as a PHSP, it must involve a reasonable element of risk that is assumed by the insurer, whether that insurer is the employer or a third party. If the plan or arrangement is such that there is little risk that the employee will not eventually receive a known and capped amount of benefits, then the arrangement is not a plan of insurance and therefore, not a PHSP. While a cap on benefits undoubtedly reduces the risk to the insurer, it is our view that an otherwise qualifying plan would not automatically be disqualified as a PHSP solely by reason of the inclusion of such a feature. Where the employer is uncertain as to the amount of claims an employee will submit, the employer is at risk for the amount up to the cap.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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