26 May 1995 External T.I. 9501715 - SELF-FUNDED PRIVATE HEALTH SERVICES PLANS

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:

The issue is whether a self-funded health services plan (dental care) qualifies as a private health services plan (PHSP) as defined in subsection 248(1) of the Income Tax Act.

Position TAKEN:

Provided all the requirements set out in Interpretation Bulletin IT-339R2 are satisfied, the plan would be regarded as being a PHSP.

Reasons FOR POSITION TAKEN:

The Department has previously accepted that such a plan can qualify as a PHSP.

				950171
XXXXXXXXXX			M. Eisner

Attention: XXXXXXXXXX

May 26, 1995

Dear Sirs:

Re: Private Health Services Plan

This is in reply to your letter of January 20, 1995 in which you asked us whether a particular would qualify as "private health services plan".

We acknowledge our telephone conversation on May 12, 1995 (Eisner/XXXXXXXXXX) in which you indicated that XXXXXXXXXX is the employer with respect to the health services plan.

In the circumstances of your situation, XXXXXXXXXX in its capacity as an employer, has agreed to establish a dental care plan for all of its employees and dependants. A provision to this effect has been included in the collective agreement between XXXXXXXXXX and its employees. The plan is subject to the provisions of the plan provided by the Government of XXXXXXXXXX to certain employees who are represented by XXXXXXXXXX. The plan would not be funded and there would be no carry over of benefits from one year to the following year. In addition, there is an annual deductible amount in respect of each employee ($25 for a single person and $50 for a family).

At the outset, we wish to mention that it is not possible to determine whether a plan qualifies as a private health services plan (PHSP) referred to in Interpretation Bulletin IT-339R2 without a review of the relevant information including a copy of the plan. Should you wish the Department's position in this regard, you should contact your local Tax Services office. We are, however, providing you with the following comments which we hope you will find helpful.

As you are aware, paragraph 6(1)(a) of the Income Tax Act (the Act) requires employment benefits received by employees to be included in income. One of the exceptions are contributions made by an employer to a PHSP.In a typical unfunded health services plan, the employer undertakes to indemnify employees an agreed amount concerning the employees' health care expenses. The quantum of reimbursement in respect of each employee would be reasonable. Indemnification occurs only when the service has actually been provided and proof of entitlement to indemnification has been provided to the employer by the employee. The plan would not be a trusteed plan and no segregation of the funds to the plan occurs. Any payments required to be made by the employer would be disbursed from the employer's operating bank account.

With respect to the above type of arrangement, paragraph 7 of IT-339R2 makes the general statement that the related payments may come within the definition of a PHSP and that this occurs where the employer has a contractual obligation to make such a payment. Whether or not such an obligation would exist would involve a finding of fact in each particular situation. However, where the existence of such a plan is specified in a union contract and the details of the plan are provided to the employees, it is our general view that this requirement has been satisfied.

Two other requirements of PHSPs are set out in paragraphs 1 and 4 of IT-339R2. Paragraph 1 indicates that coverage must be for one or more of the employee, the employee's spouse, and any member of the employee's household with whom the employee is connected by blood relationship, marriage or adoption. Paragraph 4 indicates that expenses covered by a PHSP are limited to those which would otherwise have qualified as a medical expense under paragraph 118.2(2) of the Income Tax Act. Terms with respect to these requirements should be included in the plan.

A further requirement is that a PHSP must be in the nature of insurance and, in that regard, must contain the basic elements set out in paragraph 3 of IT-339R2.

We also note that where each eligible individual is allocated a certain dollar amount in respect of a specific period of time such that the employer's indemnification for the time period could be anywhere between a deductible amount and the dollar amount allocated, it is our view that a health services plan would be in the nature of insurance.

Subject to the above comments, it is our view that a health services plan, which is established by an employer in respect of dental care, can qualify as a PHSP.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

Edmonton Tax Services office