A Private Health Service Plan (PHSP) is defined under section 248 of the Income Tax Act, as a "contract of insurance in respect of hospital expenses, medical expenses or any combination of these OR it could be a medical care or hospital care insurance plan.
While CRA has not expanded on the above they have published administrative guidelines and technical interpretations containing it's view of the meaning PHSP's.
Most notably in August 1989 CRA issued it's interpretation bulletin IT-339R2 "Meaning of Private Health Service Plan" Contained there-in paragraph 3 references the requirement that a PHSP be a plan in the "nature of insurance" and specifically that the following requisites must exist:
Traditional Health & Dental plans offered by life insurance companies are mentioned as qualifying as a PHSP. However, as stated in paragraph 7 of IT-339R2 PHSP's may also be "self-insured" provided the above required elements exist.
A health and/or dental plan administered by Innovative Benefits Inc meets the qualifying requirements of a PHSP as the administrative agreement (employment agreement) that the employer enters into is an obligation on the part of the employer to reimburse it's eligible and participating employee's for eligible expenditures incurred. In addition- to satisfy the "nature of insurance" there must be a certain element of risk that is assumed by the employer in that the employer 1) Does not retain the right to cancel the plan at any time, only upon the annual anniversary can a plan be cancelled; and 2) Advance written notice must be provided to the employee.
In addition, CRA technical interpretation #2012-044701E5 released in June 2012 confirms that while a plan with a Cap such as those inherent with a Health Spending Account, CRA references that while the CAP would not be a problem, the employers sole discretion regarding termination of the plan would be. Health Spending Accounts per subsection 248(1) of the ITA and IT-529 paragraph 16 dated February 1998 states that if the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed or entitled to the annual amount allocated to him or her then the arrangement is not considered a plan of insurance and does not qualify as a Private Health Service Plan. Also paragraph 17 provides that if the employee is able to withdraw or transfer funds out of the plan that it would not qualify as a PHSP.
Further- IT-339R2 recognizes that "cost plus" plans can also qualify as a PHSP providing that only qualifying and eligible medical and dental expenses are covered by the plan. ie- "wellness" plans do not qualify and therefore do not enjoy the favourable tax treatment that PHSP's do.
Not all PHSP's are compliant and therefore may not qualify as a PHSP at all.
