Medical expenses under microscope

‘Clarification’ in federal budget could affect workplace health plans
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 04/03/2008

One small, unexpected announcement in the 2008 federal budget could have big implications for workplace health plans. The issue is medical expenses — the government has clarified the wording in the Income Tax Act so over-the-counter drugs no longer qualify as eligible expenses under the Medical Expense Tax Credit (METC) program.

In particular, eligible drugs would be restricted to those medications both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. This ensures only costs for substances not generally available to the public and required for medical reasons receive tax relief, said the government.

“Recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. Such an interpretation goes beyond the policy intent of the METC,” said the budget.

So, as of Feb. 26, 2008, drug products that do not legally require a prescription are now considered a taxable benefit (except for oxygen, vitamin B12 for pernicious anemia and insulin), including vitamins, vaccines and nitroglycerin.

The announcement has lead to uncertainty about private health-services plans (PHSPs) and whether they can continue to cover over-the-counter (OTC) drugs while maintaining tax-preferred status. Canada Revenue Agency (CRA) requirements state hospital or medical expenses covered under a PHSP are those “which normally would otherwise have qualified as a medical expense” under METC provisions.

“There’s a list of dental and medical procedures and drugs that are considered admissible,” said François Poirier, a senior consultant in the GHC practice at Toronto-based Watson Wyatt. “The exact same list is referred to as to what an employer sponsor program can pay and not pay to maintain the fiscal tax advantage of the plan.”

The costs of OTC drugs have been increasing and it’s become quite easy to meet the eligibility to gain tax credits, he said.

“I guess they just want to close the loop on that, to some extent,” said Poirier.

Some of the uncertainty may have gone away as the Department of Finance confirmed to the Canadian Life and Health Insurance Association in Toronto the budget referred only to the METC and was “not in any way linked to the PHSPs,” said Irene Klatt, vice-president of health insurance.

But a February information bulletin from the CRA repeats the budget proposal, so it’s highly speculative at this point, said Poirier.

“Until the CRA confirms whether or not OTC drugs will remain ineligible drugs, it’s status quo, it’s a matter of waiting to see what course of action plan sponsors will need to take,” he said.

And there is still no clarification with regard to health-care spending accounts or cost-plus arrangements, which refer to the Income Tax Act, said Andrew Tsoi-A-Sue, a Toronto-based principal with Eckler consultants and actuaries.

“As such the intent with respect to those plans is still under some cloud,” he said. “It’s one thing for the Department of Finance to say this is not the intent… I’d be kind of wary of where we go with that until we see the regulations.”

While the budget attempted to clarify the situation for individuals, to avoid further court cases, it’s not clear if the government understood that, as it’s written, it could have application to group plans, said Steve Bradie, chief operating officer at Toronto-based Green Shield Canada, a provider of health and dental benefit programs. If this change goes through, it’s too widely encompassing and exceptions need to be made, he said, particularly for important drugs that don’t require a prescription, such as vaccines or nitroglycerine.

“If we can get written clarification, that will go a long way to solving this. If we don’t there’s still going to be this interpretation problem,” said Bradie. “We have two arms of the government at this point and we’re getting mixed messages.”

If the ruling does apply, employers could adjust the coverage list or continue to cover these drugs and have the carrier issue a T4 as a taxable benefit. But if employers consider it welcome news they don’t have to cover OTC drugs, they could be mistaken, he said.

“If they have to stop covering the OTCs, which generally are cheaper, employers will ask their doctors for something that requires a prescription, which in some cases can be 10 to 20 times as expensive.”

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