Skyrocketing health costs, an increasingly diverse work place and greater flexibility of where to spend health dollars may well spark an increase in the number of healthcare spending accounts (HSAs) in Canada.
“I certainly see HSAs as a growing business,” says Scott Maclagon, a Toronto-based independent employee benefit consultant. “It’s the only way an employer can control the costs and get the employees involved in the management of the money.”
Maclagon, an early adopter of HSAs in Canada, says many employers are looking for a health plan that can be an alternative to a traditional employee benefits package. Having an HSA provides companies with total and absolute cost control because there’s a specific amount employees can use under the plan and the rest is out of their pockets.
That amount varies, but is often a minimum of $1,000 to $5,000 for managers and perhaps some executives. The employees can then use the money from the account to either augment their regular health plan or get some costs covered that aren’t in their health plan.
Higher drug costs
The problem is the cost of the traditional employer-insured approach has skyrocketed in recent years, mostly the result of higher drug costs from products like biologics and biosimilars.
“Employers today simply can’t afford a 15%-20% or 30% compound increase in the cost of their health and dental plans year after year,” says Maclagon. “In five years, their costs have essentially doubled in most programs. But they are looking for cost control and that’s what the health spending account gives them.”
Don Bisch, director of group marketing at Equitable Life, says the plans can be of most benefit to smaller employers who want to address the needs of a diverse workforce.
The medical needs of a 25-year-old single person vary considerably from those of a 46-year-old, married with children. But smaller companies often don’t have the size, scale or resources to offer a comprehensive benefit plan that will cover all of those requirements, says Bisch.
“So what it allows them to do is provide that flexibility – but without breaking the bank,” says Bisch.
He says many employers, large and small, realize the importance of having a benefits plan of some sort as a way to attract and retain employees, while also educating employees on how to become smarter consumers and how to get the most they can out of the contribution.
The accounts themselves provide a lot of flexibility and a range of options, basically anything that qualifies for the medical tax credit under the Canadian Income Tax Act. This may include coverage for services like physiotherapy, glasses and orthotics.
While an HSA can be used to cover expenses not covered under a traditional benefits package, it can also be used to augment costs over and above their benefits package limits.
Advisors selling the idea of an HSA should first have a long talk with business owners to determine what they can afford in terms of a health plan. Some employers want to offer “the cheap but cheerful standard cookie-cutter options,” says Bisch. Others have a diverse workforce and want to offer their employees a package that will be meaningful to them. “So it’s a matter of [advisors] sitting down with clients, figuring out what their objectives are. For example, do they even want to offer a benefits plan in the first place and if they do, then what options work best? That could result in a health care spending account or a more traditional plan or a combination of both.”
Costs are tax deductible
Of benefit to employers is the fact that costs associated with offering an HSA are tax deductible as a business expense, with the exception of Quebec, he says. As well, the benefits the employees receive through the HSA are tax free, with the exception of Quebec.
Maclagon says an interpretation bulletin in the Income Tax Act allows the employer and employee to renegotiate the compensation arrangement at the expiry of a contract. So, for example, if an employee discovers one of their kids needs braces toward the anniversary of their contract, they can renegotiate and have the employer contribute pre-tax earnings to their HSA on their behalf and take a salary reduction accordingly.
Sometimes, employees don’t use up all of the employer contribution. If, for example, an employer contributes $2,000 in year 1 and the employee only spends $500, that $1,500 moves forward into year 2 and gets used first in year 2 for new claims, says Maclagon. If at the end of year 2 there is still $500 remaining from the year 1 contributions, it’s forfeited back to the employer at the start of year 3.
He says most of his clients contribute those forfeitures to the employee group RRSP. “So the employer takes it back in as income because they wrote it off two years earlier as an expense, but then by contributing it to the employees’ RRSP program they have contributed to a new benefit for the employee and the company gets to write off that money again.”
An HSA can also cover a wider range of dependents than a traditional health and benefits program – including parents, siblings and a disabled relative, as long as they are financially dependent on the employee for support, says Maclagon.