22 February 1995 External T.I. 9428595 - HEALTH SPENDING ACCOUNT FOR COMMERCIAL CARRIER

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:

whether amendments to commercial health care plan for individuals and for employer groups to include a health spending account option will cause it to cease to be a phsp

Position TAKEN:

question of fact, generally no

Reasons FOR POSITION TAKEN:

clarified that homemaking & tutorial services, carryforward of BOTH expenses & credits or the conversion of ANY taxable amount to employee will cause plan to be offside

A. Humenuk
XXXXXXXXXX 942859

Attention: XXXXXXXXXX

February 22, 1995

Dear Sirs:

Re: Health Spending Accounts

We are replying to your letter of November 4, 1994 concerning proposed changes to be made to the medical care insurance plans offered by your client.

Your client proposes to modify the existing policy offered to individual subscribers to include a health spending account option. With this option an individual subscriber will be entitled to a reimbursement of eligible expenses not otherwise covered by the policy, including co-insurance amounts payable under the policy or other policies, to a maximum fixed annual amount per subscriber.

Expenses and co-insurance amounts eligible for reimbursement under the health spending account option will be limited to amounts which would otherwise qualify as medical expenses of the individual within the meaning of subsection 118.2(2) of the Income Tax Act (the Act). Eligible amounts may be claimed in the plan year in which they are incurred or within 12 months of the end of the plan year. Any credit remaining at the end of a plan year is forfeited by the individual subscriber. On the assumption that the current policy qualifies as a private health services plan, you ask whether the proposed changes would cause the policy to cease to be a private health services plan as defined in subsection 248(1) of the Act.

Your client also administers group medical care insurance plans for employers wishing to provide such benefits to its employees. You have asked for our comments on the status of such plans if they were to be modified to include a health spending account option similar to the one which is proposed for individual subscribers. It is your understanding that such plans will continue to qualify as private health services plans as defined in the Act provided that:

the employee does not forego any amount to which the employee would otherwise be entitled in order to obtain the increased benefit;

credits not used in a plan year are not eligible to be carried forward for more than 12 months from the end of the plan year;

eligible expenses incurred in the plan year in excess of current year available credits may not be claimed in a plan year other than the one in which the expense was incurred or the plan year immediately subsequent to it;

eligible expenses are limited to expenses which would otherwise qualify as medical expenses to the individual within the meaning of subsection 118.2(2) of the Act; and

no amount is paid to the individual in cash in respect of unused credits.

The income tax implications resulting from proposed transactions are confirmed by this Department only by way of an advance income tax ruling as described in Information Circular 70-6R2 "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto dated September 30, 1992. However, we are prepared to offer the following general comments which may be of assistance to you.

While a policy for individual subscribers such as that described in your letter would generally meet the definition of a private health services plan, it must be stressed that coverage for expenses must be limited to the reimbursement of expenses which would otherwise have qualified as a medical expense for that individual under subsection 118.2(2) of the Act. Accordingly, a plan which covers other types of expenses incurred in connection with an illness or accident such as homemaking services or tutorial services or which provides a daily allowance instead of a reimbursement will not be a private health services plan.

With respect to a group plan administered on behalf of an employer, it is important to note that 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 whole 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.

With respect the requirement that the amount allocated to an employee's health spending account not rely on any amount forgone by the employee, we wish to clarify that an employee will be required to include in income the value of any amount or benefit which is forfeited in exchange for an allocation of credits to a health care spending account to the extent that such amount or benefit would have been included in the employee's income when received or enjoyed.

With respect to the issue of carryforward of credits and expenses, it is our view that a plan which permits the carryforward of either credits or 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 carryforward provision in the plan.

We caution that the above-noted comments represent our views generally on the subject of health spending accounts and should not be construed as confirmation of any particular plan as a private health services plan.

We trust our comments will be of assistance to you.

Yours truly,

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