Flex accounts, health trusts need special tax attention

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checklist-clipboard-surveyBenefits plan tax issues can be tricky. But small biz advisors need to ensure their clients are onside with the Canada Revenue Agency — and stay on top of any tax concerns.

Here are two tax issues surrounding health and benefits plans that need attention, according to Jason Faulkner principal at Advocate Benefits Consulting in Toronto.

Health & Welfare Trusts
Health and welfare trusts (HWT- CRA Tax Folio S2-F1-C1) are very similar to a PHSP in terms of tax effectively reimbursing employees for eligible medical expenses. However, contributions to these trusts can be written off by employers when the contributions are made to the trust, which could potentially exceed what is required to meet the health and welfare costs for employees.

This creates the potential for employers to reduce their tax by overfunding the HWT, which can draw CRA’s attention. Faulkner cautions that HWTs require appropriate actuarial support to ensure contributions are reasonable.

Flex Spending Accounts
Faulkner says “Flex Spending Accounts” are an exciting new product that’s gaining traction in the marketplace. These plans leverage the Flexible Employee Benefit rules laid out in Bulletin IT-529 to provide employees the ability to choose whether to allocate a set amount to a Healthcare Spending Account (a type of PHSP) or to a wellness account.

While a wellness account isn’t limited to CRA’s list of eligible medical expenses, any amounts reimbursed to employees would be considered a taxable benefit. The employer can really put anything they want into the wellness account that they think will contribute to employee engagement and productivity: daycare, environmental stewardship, gym memberships, TFSAs, RSPs, etc.

And while the wellness account may not receive the favourable tax status given to a PHSP, it is worth noting that many of the wellness options can provide the employee with deductions or credits when it comes time to filing income taxes. The fact the wellness account isn’t a PHSP can also provide the employer a reprieve on provincial RST and premium taxes that would otherwise be payable for a PHSP.

Transcontinental Media G.P.