What is a Private Health Services Plan (often referred to as a PHSP)?
PHSP available in Calgary, Vancouver & Toronto (and all area between)
Many providers of Health Spending Accounts don’t use the name Health Spending Account at all, but simply call these plans PHSPs or Private Health Services Plans.
This confuses the issue.
The term PHSP or Private Health Services Plan, is in fact an umbrella term that was coined by Canada Revenue Agency (CRA). It’s discussed in subsection 248(1) of the Income Tax Act, and further in interpretation bulletins such as IT-339R2.
This simply defines the general term of Private Health Services Plan (PHSP) as a contract or plan of insurance in respect of hospital care or medical expenses. It goes on to say that a health services plan may take any number of forms and still qualify as a PHSP.
A PHSP must meet the following three criteria:
- It must be a contract or plan of insurance for hospital or medical expenses;
- The plan must only cover medical expenses covered under subsection 118.2(2) of the Act for medical expense credit;
- It must only cover eligible expenses of an employee, spouse, or partner, or dependent of an employee.
In other words, the term PHSP encompasses otherwise widely diverse types of plans. Essentially, CRA says “if you have a plan that meets all these various criteria for being a PHSP, then we’ll consider what the employer pays into that plan to be an expense, and we’ll consider the benefit to the employee to be non-taxable”.
Consequently, one can get widely different types of plans that are PHSPs. For example, some traditional monthly insured plans also qualify as PHSPs.
What we provide is one specific type of plan, known as a Health Spending Account (HSA). Our HSA is also a PHSP since it meets all the criteria for a PHSP. (In other words; while our HSA is a PHSP, not every PHSP is going to be an HSA).
A Health Spending Account is unlike any other type of PHSP or traditional insured plan: there is no regular (eg monthly) fixed contribution or “traditional premium” at all. Instead, when an employee claims for a medical expense that was paid out-of-pocket, the employer (company) pays the amount of the claim. One can almost think of the employer being the “insurer” or “underwriter”.
In other words, a Health Spending Account allows any incorporated company effectively to take its before-tax dollars and put those into the pockets of employees/employee-owners tax free, provided that this is to reimburse eligible medical claims according to the rules of a PHSP. Therefore a third party (like PreTax Health and its adjudication partners) must process those claims to ensure all claimed items are eligible under the CRA’s PHSP rules; and also as there are privacy issues for a company to see private medical details about its employees.
Note again the requirement that a PHSP must be a “plan or contract of insurance”. Under IT-339R2, this has a very specific definition: for a contract of insurance to exist, five elements must be present: a) it is an undertaking by one person b) to indemnify another person, c) for an agreed consideration, d) from a loss or liability for an event e) where the happening is considered uncertain.
In the case of PHSPs that are traditional insured types of plans, then it is clear that such an indemnity agreement exists, as there is a traditional insurer that is indemnifying the employee against a loss.
However, in the case of a Health Spending Account, it is the employer (company) that is footing the bill for the claim; there is no other “insurer” in the usual sense of the word. As mentioned above, one can almost think of the company as being similar to an “insurer” or “underwriter” here.
In order for an HSA to qualify as a PHSP, it must still meet the criteria of being a “contract of insurance” per IT-339R2. This in turn means it is necessary to arrange for how indemnity is transferred from the employee to the employer.
Therefore, three additional criteria must be met by a Health Spending Account: Since a contract of insurance must be established (ie indemnitytransferred), 1. there must be a contractual obligation for the employer to cover the employee’s eligible expenses (employer indemnifies employee) by (2) there being an undertaking between the employer and administrator that the employer will cover the claims as adjudicated by the administrator; and (3) there being an undertaking between the employee and the administrator that the administrator in turn will reimburse the eligible claim to the employee upon receiving funding from the employer.
As noted elsewhere, it is our impression that many providers of HSAs are not working according to either the letter or the spirit of the law. It is extremely important to us to get it absolutely right. Therefore, a number of years ago our adjudication partner had one of the largest international consulting firms look at this in very great depth, so we could be supremely confident in their level of compliance. The result further reinforces our impression that many of the other providers get things like this “contract of insurance” aspect quite wrong. This is also why, for example, our HSA is only available to incorporated companies, and not to sole proprietors.