28 October 1997 Internal T.I. 9723617 - EMPLOYER PLAN TO REIMBURSE MEDICAL NOT A 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 medical plan with a carry forward of the unused limit and a carry forward of expenses in excess of limit

Position:

not a phsp

Reasons:

insufficient risk to qualify as a plan of insurance

		October 28, 1997

OTTAWA TAX SERVICES Headquarters
Client Services A. Humenuk
957-8953
Attention: Peter Murphy
972361

XXXXXXXXXX

We are replying to your note of August 2, 1997 in which you asked for our comments on a proposed plan to be implemented by XXXXXXXXXX in respect of medical and dental coverage for their employees.

The issue is whether the proposed plan will qualify as a private health services plan (PHSP) as defined in subsection 248(1) of the Income Tax Act (the "Act"). If the plan qualifies as a PHSP, no amount will be included in the employees' income on account of the employer's contribution to the plan, but if the plan is not a PHSP, the amounts paid to employees as a reimbursement of medical or dental expenses will be included in their income as employment income.

As stated in paragraph 7 of Interpretation Bulletin IT-339R2, an arrangement where an employer reimburses its employees for medical or hospital expenses may come within the definition of a PHSP where the employer is obligated by the employment contract to pay such expenses. However, in order for a plan or arrangement to qualify as a PHSP, it must be a plan of insurance and thus 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 PHSP. In such circumstances, the amount allocated for the employee's eventual use is merely an additional salary allocation and is taxable at the time that it vests with the employee.

While a carry forward period undoubtedly reduces the risk element in a health spending account, it is our view that a plan which permits the carry forward of either the unused allocation or eligible medical expenses (but not both) up to a maximum of 12 months will not be disqualified as a PHSP solely by reason of the carry forward provision in the plan. Since the plan submitted by XXXXXXXXXX involves a carry forward of both credits and expenses, it is our view that it would not be a PHSP.

We have spoken with XXXXXXXXXX and advised him that the plan, as presently proposed, would not be a PHSP. As the plan has not yet been implemented, he advised us that he will recommend that the appropriate modifications be made.

C. Chouinard
A/Section Chief
Business, Property & Employment Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch