In connection with the COVID-19 pandemic and the many restrictions that have been placed on health related services, the Canada Revenue Agency (CRA) has recognized that members of a Health Care Spending Account (HCSA) might not be able to use HCSA credits that would otherwise expire during the pandemic. As an accommodation to these extraordinary circumstances, the CRA has stated (in CRA Views 2020-0846751E5) that credits allocated to a HCSA that are unused and will expire in the period between March 15 and December 31, 2020, may, subject to the terms of the HCSA, be carried forward for an additional period of up to six months.

General One Year Carry Forward Limitation

HCSAs are, for reasons of tax efficiency, normally designed to qualify as private health services plans (PHSPs). In addition to satisfying certain other conditions, this means that a HCSA must qualify as a plan of insurance, involving a reasonable element of risk. If the terms and conditions governing a plan or arrangement are such that there is little risk that an employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the plan or arrangement is not a plan of insurance, and the HCSA will not qualify as a PHSP. However, the CRA has taken the position (as outlined in paragraph 16 of Interpretation Bulletin IT-529, Flexible Employee Benefit Programs) that a HCSA will not generally be disqualified from being a PHSP if it permits a carry forward of either unused credits or eligible medical expenses to the next plan year (not exceeding 12 months).

This plan of insurance/risk of loss condition has resulted in the following three general HCSA models:

1. Use it or lose it model – no opportunity is provided to carry forward of unreimbursed eligible medical expenses or unused credits.
2. Carry forward of credits – unused credits are carried forward to the next plan year.
3. Carry forward of expenses – unreimbursed eligible medical expenses are carried forward to the next plan year.

Temporary Additional Carry-forward Opportunity

The CRA has acknowledged that employees may not have been able to use the amounts credited to their HCSAs because of the restrictions placed on many services during the current COVID-19 pandemic. In these extraordinary circumstances, the CRA has stated that a HCSA may provide an additional temporary carry forward, of up to six months, respecting unused credits expiring between March 15 and December 31, 2020. The CRA has expressed the view that a carry forward period of up to six months would generally be considered reasonable and would not, in and of itself, disqualify the HCSA from being a PHSP.

Importantly, however, as the terms of the particular HCSA will determine whether an employee can carry forward any unused credits, those terms may need to be modified if the employer or sponsor of the HCSA intends to provide a temporary extension to plan members. Employers and plan sponsors will also need to take care in clearly communicating the changes.