Employer Reimbursement for PHSP Premiums
Arthur Drache, September 05, 2006
For many Canadians, the most attractive perk of employment is coverage under a health care plan. Usually with large employers, they enter into such plans with insurers and cover all or part of the employee premiums.
These are called private health services plans or PHSPs. For purposes of the Income Tax Act, a PHSP is defined as 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 care insurance plan, or any combination of such plans
Generally, an employer is entitled to a deduction for contributions made to a PHSP in determining its income provided these requirements are met, the contribution is reasonable in amount, and the amount is laid out to earn business or property income. The benefits received by employees in respect of the employer contributions to the PHSP are not subject to tax by virtue of subparagraph 6(1)(a)(i) of the Act.
But what happens if the employer for whatever reason does not have such a plan or has a plan which covers only some employers such as those working full time, but not others? In a recent ruling, the CRA seems to offer a reasonable substitute. The question posed was the tax treatment of the reimbursement of premiums for health and dental benefits by an employer to one of its part-time employees.
The key part of the ruling was as follows: “Subject to certain exemptions, paragraph 6(1)(a) of the Act includes in a taxpayer’s income the “value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment.” Subparagraph 6(1)(a)(i) of the Act however, specifically excludes benefits derived from the contributions of the taxpayer’s employer to or under a Private Health Services Plan (a “PHSP”).
The ultimate determination as to whether or not any particular arrangement would meet the definition of a PHSP is a question of fact and would involve a review of the specific contract and other relevant documentation concerning the arrangement. In general terms, however, it is our position that medical and hospital insurance plans offered by Blue Cross and various other life insurers would be considered a PHSP within the meaning of 248(1) of the Act. ”
In a nutshell, providing the plan meets the definition of a PHSP, which most private insurance plans would do, the employee could re reimbursed by their employer for premiums paid to Blue Cross or a similar plan, and not have a taxable benefit.the same result a you would get if it were an “employer plan”.
This may turn out to be a useful approach with smaller employers and those who don’t want to have the paperwork associated with entering into such an arrangement for a significant number of employees.