2016-0633741C6 2016 CALU Q6 - PHSP-sole employee dealing at arm's length

Principal Issues: Can a plan be considered a PHSP if an employer only has one employee who deals at arm's length with them?

Position: Question of fact, but yes if all conditions to be a PHSP are met.

Reasons: There is no requirement that a plan have more than one member.

Author: Waugh, Phyllis
Section: 6(1)(a)(i); 248(1) definition of PHSP

CALU Roundtable - May 2016

Question 6 - Private Health Services Plans

Background

Employment benefits are generally included in an employee’s income under paragraph 6(1)(a) of the Act. There are, however, a number of exceptions in the Act, such as where the employer provides health benefits to its employees through a private health services plan.

A private health services plan (“PHSP”) is defined under subsection 248(1) of the Act as a contract of insurance in respect of hospital expenses, medical expenses, or any combination of such expenses or a medical care insurance plan, a hospital care insurance plan, or any combination of such plans.

In paragraph 3 of Interpretation Bulletin IT-339R2, “Meaning of private health services plan [1988 and subsequent taxation years]”, the CRA states that a PHSP must be a plan in the nature of insurance. Therefore, in the CRA’s view, the plan must be:

(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.

Interpretation Bulletin IT-339R2 further goes on to state:

6. In a "cost plus" plan an employer contracts with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan. The employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company. The employee's contract of employment requires the employer to reimburse the plan or insurance company for proper claims (filed by the employee) paid, and a contract exists between the employee and the trusteed plan or insurance company in which the latter agrees to indemnify the employee for claims on the defined risks so long as the employment contract is in good standing. Provided that the risks to be indemnified are those described in paragraphs (a) and (b) of the definition of "private health services plan" in subsection 248(1), such a plan qualifies as a private health services plan.

More recently the CRA has expressed the view in Technical Interpretation 2014-0521301E5 (dated June 25, 2014) that:

…. a cost-plus plan under which the administrator agrees to reimburse the sole employee-shareholder, his or her spouse, and members of his or her household for actual medical and hospital expenses and receives, as consideration, an amount equal to the amount reimbursed plus an administrative fee, does not qualify as a PHSP since it does not contain the necessary elements of insurance. Effectively, the sole employee-shareholder is paying for the personal hospital and medical expenses for himself or herself and his or her household members through his or her solely-owned corporation without any risks being assumed by the Plan administrator. Therefore, it is our view that a cost-plus plan for a sole employee-shareholder would not likely constitute a plan in the nature of insurance.

Question

Would the CRA views as expressed in Technical Interpretation 2014-0521301E5 be different if the plan member was the company’s sole employee who deals at arm’s length with the company? The sole employee’s spouse and members of his or her household are also covered under the plan and deal at arm’s length with the company. We would note that in this fact pattern:

*     one party (the employer-corporation)
*     has undertaken to indemnify another person (the arm’s length employee) for a loss or liability (health care expenses)
*     pursuant to a contract of employment
*     from a loss or liability (health care expenses)
*     the occurrence of which is uncertain.

As well, per paragraph 6 of Interpretation Bulletin IT-339R2, the employer has contracted “with a trusteed plan or insurance company for the provision of indemnification of employees' claims on defined risks under the plan” and “the employer promises to reimburse the cost of such claims plus an administration fee to the plan or insurance company.” 

CRA Response

The determination of whether a particular administrative-services-only plan qualifies as a private health services plan (PHSP) is a question of fact.

To qualify as a PHSP, a plan must meet certain conditions as outlined in Interpretation Bulletin IT-339R2. One of those conditions is that the plan must be in the nature of insurance. In this respect, the plan must contain the basic elements listed in paragraph 3 of IT-339R2. Whether a plan contains those basic elements depends on the facts of the situation. For example, it would have to be determined whether the company has a contractual obligation to reimburse the employee’s health care expenses.

Assuming that the plan otherwise qualifies as a PHSP, it is the CRA’s view that a plan for one plan member (which could include coverage for his or her spouse and members of his or her household), who is the company’s sole employee and who deals at arm’s length with the company, may qualify as a PHSP.

Phyllis Waugh
2016-063374
May 3, 2016

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