The MEDdirect™ Private Health Services Plan (PHSP)
This reference document is intended to give an overview of our Medical Reimbursement Program, SABRE MEDdirect™.
The SABRE MEDdirect™ PHSP finds its roots in Sections 248(1) and 118 of the Income Tax Act and Interpretation Bulletins IT-339R2, IT-85R2, IT-519R2, IT-502, and IT-529.
Properly structured, the SABRE MEDdirect™ PHSP will permit employers to provide tax-free medical reimbursement benefits to employees, while being able to deduct expenses arising there from.
SABRE Health Direct Inc. (under the Terms of the SABRE HWT) through the SABRE MEDdirect™ PHSP, sets up the administration of the PHSP for the employer, and adjudicates the employees' claims for reimbursement on an arms' length basis. (Sample documentation attached.)
SABRE Health Direct Inc. requires our valued clients to consult with their professional advisors (including, but not limited to, their accountant, lawyer, and tax advisor) to properly assess whether their participation in the SABRE MEDdirect™ PHSP is consistent with their structure, employment status and by-laws, as well as other issues to which SABRE Health Direct Inc. may not be privy in the normal course of doing business.
The SABRE MEDdirect™ PHSP is set up in compliance with CRA rules as set out in IT-339R2, IT-85R2, IT519R2, IT-502 and IT-529, wherein the applicable sections of the Income Tax Act are named, governing services to be provided to qualifying entities.
The SABRE MEDdirect™ PHSP being instituted for an eligible client qualifies as a 'cost plus' or 'trusteed' health plan, in compliance with paragraph 6 of IT-339R2 - Meaning of Private Health Services Plan (1988 and subsequent taxation years).
The SABRE MEDdirect™ PHSP being instituted for an eligible entity is 'in the nature of insurance' as set out in IT-339R2 in that it satisfies the basic elements of the 'points of insurance' set out in Paragraph 3 thereof:
Points of Insurance (IT-339R2 ¶3)
SABRE MEDdirect™ PHSP
a) an undertaking by one person
b) to indemnify another person
The Employee/Shareholder Employee
c) for an agreed consideration
Benefit levels are established by defining employee classes
d) from a loss or liability in respect of an event
Qualifying medical expenses under Sec. 118 of the ITA (IT-519R2)
e) the happening of which is uncertain
There must be an element of risk.
For the employer this risk established by setting a benefit level for the employee, not knowing if said employee will claim up to their limit.
For the employee the risk is shared, as they will have to forfeit their unused credits after a prescribed period.
As set out in Paragraph 7 above, to meet the definition of a PHSP a given plan must be a 'contract of insurance' in respect of 'hospital expenses, medical expenses, or any combination of such expenses' or 'a medical care insurance plan or hospital insurance plan or any combination of such plans.' Therefore, as a matter of necessity, there must exist a formal contract of employment between the Employer and the Employee requiring that the Employer provide this benefit to the Employee. (Sample documentation attached.)
Where the provision of a product of insurance might be recommended, desired, or otherwise mandated by regulation, such insurance will be provided by Isaacs Block Financial Group Limited, a duly licensed life insurance brokerage in the province of Ontario, and its similarly licensed agents and/or brokers, and/or any agency/brokerage that Isaacs Block Financial Group Limited might contract in provinces other than Ontario.
With respect to Incorporated Businesses:
When a corporation enters into a cost-plus arrangement under the SABRE MEDdirect™ PHSP to cover medical expenses incurred by its employees, pursuant to Paragraphs 7 and 8 above, the relevant element of insurance would be present, even if the only employee is also the sole shareholder of the corporation. The corporation would thus be entitled to deduct its costs incurred in provision of this benefit to its shareholder employee, while the employee would bear no tax costs, as PHSP premiums paid by employers do not constitute a taxable benefit.
Provided that all the terms of IT-339R2 are complied with, this tax treatment would apply to corporations with a single shareholder/employee or multiple shareholders/employees (see Chart 1). It is important to note that the department allows a PHSP to provide any or all coverage, which would normally qualify as a medical expense under Section 118.2(2), i.e., any medical expenses for which an individual may apply for under the Medical Tax Credit.
Charts 1 through 3 below are important. They show IT Bulletins, which clarify CRA's position on owner/employee medical benefits. In summary, based on the facts of a particular situation, PHSP coverage provided to shareholders is considered an employment benefit rather than a shareholder benefit and would therefore be a non-taxable benefit.
(Disclaimer: These bulletins were sourced in the public domain, and are shown below for information only. You must consult your tax professional or accountant for verification and applicability to your own situation.)
To ensure that there exists an element of risk, all reimbursement credits must be claimed in the year in which they are incurred or within 12 months of the plan year. The individual subscriber forfeits any credits remaining at the end of a plan year.
To qualify as a Private Health Services Plan, there may be no rollover of unused credits, but the employee does have a 12-month window after a given plan year to submit claims. This applies equally to incorporated and unincorporated entities, but unincorporated businesses must run their plans on a Calendar Year basis.
Reimbursements may be made, where appropriate and duly underwritten, and within the law, to cover Private Health Plan premiums, deductibles and co-insurances and coordination of benefits between the plans of spouses. (Incorporated and Unincorporated)
Premiums for Provincial Health Plans will not be eligible for reimbursement under any plans offered by SABRE Health Direct Inc. (Incorporated and Unincorporated)
SABRE Health Direct Inc. will act in its position as Third Party Administrator of the SABRE MEDdirect™ PHSP, and will be entitled to charge an Administrative Fee for services rendered in this capacity. (Incorporated and Unincorporated)
SABRE Health Direct Inc., in its position as Administrator for the SABRE HWT and SABRE MEDdirect™ PHSP, will act at arms' length from the employer and will enforce the employer's contractual fiduciary responsibility to their employees. (Incorporated and Unincorporated)
SABRE Health Direct Inc. will charge a one-time deductible setup fee of $150 plus applicable taxes for each program established. (Incorporated and Unincorporated)
Chart 1 Private Health Services Plan Coverage for Shareholders
With respect to the shareholder-manager of a corporation, there is a general presumption that a benefit with respect to a private health services plan would be conferred on the individual in his or her capacity as a shareholder and included in income pursuant to subsection 15(1) (see Technical Interpretation No. 9505265). Revenue Canada appears to have reversed its position.
In a recent interpretation, Revenue Canada indicated that 'when equivalent coverage under a private health services plan is extended to all employees, including the employees who are shareholders, the benefit provided to the employees-shareholders from such coverage is normally considered to be an employment benefit rather than a shareholder benefit.' Where all employees of the corporation are shareholders, Revenue Canada states:
Similarly, when all employees of a corporation are shareholders and it is reasonable to conclude, based on the particular facts of the situation, that the private health services plan coverage has been provided as part of a reasonable remuneration package, the benefit from such coverage is also considered to be an employment benefit rather than a shareholder benefit. In such a case, the benefit is not included in the employee-shareholders' income by reason of the exclusion in subparagraph 6(1)(a)(i) of the Act, and the corporate employer is entitled in a deduction in respect of the contributions made for such coverage, subject to any limitations imposed under the Act.
Technical Interpretation, Business and Publications Division
July 27, 1998
Document No. 9815645
Chart 2 Private Health Services Plans Must Provide for a Degree of Risk
It is Revenue Canada's belief that a health insurance plan must involve a reasonable degree of risk in order to meet the definition of 'private health services plan' in subsection 248(1). Plans that provide an indefinite carry-forward of unclaimed medical expenses would not involve a reasonable degree of risk. However, a plan would have a reasonable degree of risk if it provided that any unused balances be forfeited.
Technical Interpretation, Business and General Division
June 2, 1992
Revenue Canada File No. 9210485
Chart 3 Rollover of Unused Credits in a PHSP
Is it permissible for unused credits in a health care plan established under a cafeteria plan to be rolled over to future years?
Yes. However, for the health care plan to qualify as a PHSP, the plan must involve a reasonable element of risk that is assumed by the employer. Plans that permit the choice of a rollover or a cash-out of unused credits will not qualify as PHSPs. A plan that permits the rollover of unused expenses as well as credits also is unlikely to qualify. Plans that permit the rollover of unused credits to be applied to other plans under a cafeteria plan are not considered PHSPs.
On the assumption that your current plan qualifies as a Private Health Services Plan 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 (see enclosed 118.2 Medical Expense Credit) 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. The individual subscriber forfeits any credit remaining at the end of a plan year.
Technical Interpretation, Business and General Division
Revenue Canada File No. 9428595
(Disclaimer: These bulletins were sourced in the public domain, and are shown above for information only. You must consult your tax professional or accountant for verification and applicability to your own situations.)
With respect to Unincorporated Businesses:
Self-employed Sole Proprietors
With reference to Paragraph 7 above, it is open to interpretation whether there is a separation between the sole proprietor as employer and employee. In a corporate environment the corporation is a distinct entity undertaking to indemnify another person, the employee. However, in a sole proprietorship these two entities could be one and the same. For this reason SABRE Health Direct Inc. under the SABRE MEDdirect™ PHSP requires that self-employed sole proprietors MUST purchase, within their plans, an element of health insurance that is available in our portfolio at the time of setting up the plan. Should such coverage be declined by them, they would not be eligible to participate in the program.
Self-employed Sole Proprietors
In order to be eligible for the deduction they must show one of the following:
Their net income from business in which they are regularly and actively engaged must represent at least 50% of their net income for the year.
Their net income from sources other than business does not exceed $10,000.
Self-employed Sole Proprietors and Business Partnerships
These entities must adhere to prescribed benefit maximums and, where they have staff, the staff must be eligible to enrol as well. Benefit maximums that the proprietor will enjoy, will be limited to the maximums that they allow their staff. Some, one or all of the family members may use the benefit maximums in a given year, combined. As these programs are run on a Calendar Year basis, where a plan is set up on E.G. July 1st, the benefit maximums will be 6/12ths or 50% of the annual allowance.
$1,500 per adult per calendar year
$1,500 per spouse per calendar year
$1,500 per dependent child in the household over the age of 18, while a student, per calendar year
$750 per dependent child under age 18 per calendar year
Must follow the unincorporated rules, adhere to the maximums prescribed AND like Sole Proprietors subscribe to an element of Health Insurance to ensure that the PHSP is in fact a plan based 'in insurance'.
Their staffs must be offered the program too, and where staff is involved, their classifications must be identified up front and in writing, and they must be enrolled under a separate plan to the partners, due to partnership liability issues.
Must consult their accounting and legal professionals to assess and verify eligibility for the establishment of a PHSP.
SABRE Health Direct Inc. through the SABRE MEDdirect™ PHSP has brought to market a PHSP that will allow for deductibility of premiums to the employer while benefits are received tax-free by the employees.
The SABRE MEDdirect™ PHSP provides for a Fixed Maximum Annual Reimbursement Level for each employee. While not all members within a group will have the same benefit on a Dollar basis, we require fairness, and as such, we have instituted a policy of 'equivalency' whereby each member of a classification must be offered the same percentage of income as their colleagues in the same classification.
The employer is legally obligated to fund each member's reimbursement account. (This obligation is enforceable by SABRE Health Direct Inc. under the terms of the SABRE HWT.)
The element of risk 'test' is satisfied - there may be no cash refund to the employer or employee of unused credits at the end of a plan year.
Eligible expenses under the SABRE MEDdirect™ PHSP are limited to expenses that would otherwise qualify as medical expenses within the meaning of Subsection 118.2(2) of the Income Tax Act.
Services provided, and which would qualify for reimbursement under the SABRE MEDdirect™ PHSP must be performed or prescribed by a qualified medical practitioner. (IT-519R2 refers.)
No employee may exchange earnings or other consideration for additional credits in the SABRE MEDdirect™ PHSP.
The SABRE MEDdirect™ PHSP is a plan in the nature of insurance.