Health Care Spending Accounts

Do you enjoy wrangling with insurance companies over which expenses are or are not covered under your extended benefits plan? Confused about why your dental plan that promises 100% coverage is only paying $600 of a $1,00 dental bill? Ecstatic about wasting your and your doctor’s time getting a referral letter so that your insurer will pay for physio, massage or psychologist expenses? If you can answer “yes” to all the above, then please stop reading immediately and continue with your day

On the other hand, if these experiences resonate deep in your soul on a primal level and you work for yourself or own your own company, pour an extra coffee, put on your reading glasses and prepare to save money. There is a solution to the problems above that can reduce what you pay for medical expenses over time: a Health Spending Account. With the assistance of Adam Hussey of Blendables (formerly known as “Your HSA”), the next several pages will hopefully become your blueprint to savings.

The Basics

Before providing more reasons why these plans can be game changers, particularly for those of you with companies, let’s begin with basic principles. A Health Spending Account (“HSA”) is an arrangement between your company (or yourself if you are a sole proprietor) and the company that sells these plans (the “Plan Provider”) whereby your company agrees in advance to cover employees (including yourself) medical expenses up to a set amount that your company and the Plan Provider agree is reasonable based on your budget and employee salaries. Your company either pays a monthly amount to the Plan Provider into a separate account for each employee or pays the Plan Provider on an as-needed basis, depending on the terms of the plan. For one- man bands, whether incorporated or otherwise, it is recommended to go with the pre-pay option, as the Canada Revenue Agency (CRA) might question whether your HSA is really insurance if you’re only paying for coverage after the fact rather than putting money into an account before expenses occur.

In any event, regardless of which funding option you choose, every time an employee (including the business owner) has a medical expense, he sends it to the Plan Provider, who either reimburses the employee from the money already in that employee’s account, or contacts your company to request payment. The Plan Provider then reimburses the employee for that medical expense.

(**Note... for our cost+ plan we still ask for monthly contributions based on the maximum however unused contributions can be used for the next year’s plan or be reimbursed back less the admin fees. Now other companies do pay as you go but they will also charge high start-up fees when an employee is added to a plan.)

How Does The Plan Provider Make Money?

Although the people running or working for HSA Plan Providers may be wonderful individuals, they do not provide their services for free. Most charge an administration fee on each receipt processed, plus taxes (GST always and PST in some provinces) that is typically 10%, although some plans do charge less. Some plans charge a set annual fee per employee, which can save money if there are a lot of expenses each year, although they may cap total yearly expenses per employee that can be processed. Some plans charge a set-up fee as well. It can be possible to set up a plan privately and find someone else to act as the plan administrator. These plans cost perhaps $1,500 to $2,000, plus whatever the person who acts as your administrator charges. On the other hand, this increases the chances of later problems with the CRA if the administrator is merely a rubber stamp; a good HSA provider also acts as a gatekeeper who vets submitted expenses along the way and disallows those that are offside. For most of us, it makes sense to go with a plan provider.

Tax Consequences         

In addition to the numerous other advantages I’ll itemize in a few paragraphs, the potential tax savings through a HSA are often substantial when compared to paying those expenses out of your own pocket as an individual. When paying for these expenses personally, you are only eligible to claim a tax credit on the portion of your medical expenses that exceed the lower of 3% of your taxable income or $2,237 (as of the date of this article). Moreover, even if you have enough expenses to qualify, since the eligible amount is only a credit rather than a deduction, this also means that you would receive a non-refundable tax credit equal to about 20% of the eligible amount. For a self-employed person living in B.C. for example, this means missing out on deducting 47.7% of the medical expenses starting with dollar one for those in the highest tax bracket. Remember, tax rates vary by province of residence.

On the other hand, if you are an incorporated business owner, you would have had to pay tax on the extra money you needed to flow out of your company to cover medical expenses. As a result, your tax savings are the tax avoided on this money. Although a traditional medical plan funded by your company would have also covered this expense, as you’ll see below, those plans may still require families to pay a substantial portion of medical expenses out of their own pockets. In contrast, a HSA may potentially eliminate the majority of extra costs.

Benefits Of An HSA Versus An Extended Benefits Plan

A. Cost Certainty

In talking to clients and advisors who work in the group insurance space, one of the biggest frustrations is the yearly squabble and uncertainty about the cost of next year’s extended health premiums. It usually isn’t a question if your premiums are going to increase, but by how much. Want to shop around for a new benefit provider? This may save money in the short-term but it is not uncommon for insurers to offer lower rates to attract business and to boost costs later. Of course, even if you are willing to change insurance companies every few years to save dollars, this will cost you in time and frustration in continually adapting to the practices of new insurers and learning the different rules and coverage limits for each new plan.

By contrast, a HSA allows you to budget exactly how much you are willing to spend per employee each year so that your costs don’t increase unless you want them to.

B. Ability To Carry Forward Unused Benefits

If you don’t use a traditional benefits plan one year, the only winner is the insurance company, who still gets to keep all the premiums paid into the plan. By contrast, a HSA can be set up so that unused benefits in one year can be rolled over indefinitely so that there is a good chance that the employee will benefit from his employer’s generosity at some time. It also means less money thrown away and more rewards for employees with traditionally low medical expenses. In addition, employees have the option to “save up” for big ticket medical expenses coming their way in the future, such as braces for their children, laser eye surgery or fertility treatments, rather than feeling like they need to use up their benefits each calendar year on services they don’t really need just so they don’t miss out.

C. Flexible Coverage

A HSA provides an annual amount per employee that can be used for any qualifying medical expense, along with the unused balance from any previous years. That means less wastage as the employee can apply his HSA against his actual medical expenses that year rather than according to the rules and coverage limits of a traditional plan that may not provide full coverage and may also result in the employer paying for benefits that are not needed.

For example, if an employee’s spouse already has a good benefits plan, that employee really doesn’t benefit from his own extended benefit. On the other hand, even the best plans typically have coverage limits or won’t cover all medical expenses. If that employee had a HSA instead, he would be able to use this account to cover the amounts not reimbursed under his spouse’s plan and bank the unused portion for the future, such as if their children need braces in a few years.

By contrast, a traditional plan has rigid limits on the types of benefits provided, how much can be charged per visit or how much can be spent in total each year on a certain category of expenses. It is far more likely that traditionally more expensive coverage may provide less benefit to that employee if the coverage he needs doesn’t mesh exactly with the coverage a traditional plan actually provides.

D. Elimination Of Deductibles And Coverage Limits / More Cost-Efficient Coverage

Since there are no coverage limits per visit or type of expense, other than how much money is left in that employee’s own HSA, employees are only out of pocket if their medical expenses that year exceed the account balance. That means full coverage for all drug, dental, chiro, physio, naturopath, etc. expenses each year if they stay under that amount with no out-of-pocket expenses to that employee.

By contrast, traditional plans have a variety of limits that ultimately mean more money out of employees’ pockets along the way, even if that employee only has modest medical expenses. Glasses are the best example, as many plans limit coverage to only $300 or less every two years, regardless of the employee’s actual needs or costs.

Consider the following as an additional example - even though an employee spends $1,500 at $175 per session on counselling services that year when going through a divorce and has no other medical expenses that year, coverage might be limited to $60 per visit and $600 per year. A HSA would cover the full $1,500 rather than just $600 as long as the employee had a large enough account balance. In other words, the employee would get the benefit of having no other medical expenses that year rather than the insurance company.

Furthermore, it is often the case that 80% or 100% coverage in a traditional benefit plan can still leave an employee with a rather large bill. How is this possible, you may ask? It is because they reimburse only 80 or 100% of the “covered amount”. For example, the insurer may decide that dentists should only charge $600 for certain types of covered services, while the going rate is really $1,000. As a result, an employee with 100% dental coverage will still have to pay $400. Again, a HSA eliminates this problem.

E. A Simpler, Easier Process

Once the HSA is in place, the employee only needs to submit receipts to the HSA provider and wait for a cheque. There is no need to get doctor’s notes to claim reimbursement, to try to figure out coverage limits or to wrangle with insurance companies who may initially deny claims that are ultimately valid. As long as the expense is a qualifying medical expense and there is enough money in that employee’s HSA, the claim is covered and paid. Since HSA providers are usually paid per receipt reimbursed, they make more money by approving expenses, compared to insurance companies, who benefit from denying rather than paying claims! Moreover, like traditional extended benefits plans, most HSA’s now allow employees to submit claims online rather than mailing in receipts.

Finally, how many employees lose out on medical benefits because they don’t understand their coverage or because they can’t be bothered to get doctor’s notes prescribing massage, physio or similar treatments? Since HSA’s don’t have these issues, the chances of employees missing out on benefits because of the “hassle factor” are vastly reduced.

F. More Transparent, Tangible Value To Employees

Since the cost of most extended health plans is not broken down and explained to employees, how much do they really appreciate such plans? Moreover, if they are still paying for a lot of their medical expenses out of their own pockets due to the other issues mentioned previously, would they think it was money well spent on their behalf if they did know the price tag?

On the other hand, a HSA tells employees exactly how much their employer has contributed towards their family’s medical expenses. Because of this knowledge and HSA’s ease and flexibility of use, the average employee is both more likely to appreciate their employer’s largesse and more likely to benefit from it.

G. Coverage Of A Wider Range Of Expenses

HSAs cover expenses that traditional plans do not. In addition to not capping vision expenses, employees can even use their HSA’s to cover laser eye surgery, orthodontics and fertility treatments, to name a few.

H. Wider Potential Range Of Dependants

Most traditional benefits plans limit an employee’s dependants to spouse and dependant children 25 and younger. Under a HSA, this arbitrary age distinction can be eliminated. In fact, employees may even be able to claim expenses they incur on behalf of economically dependant parents. Although these types of plans may be best suited for the business owner and his own family and may not come about too often, this feature can be extremely valuable when it does.

I. Different Benefit Levels For Different Classes Of Employees

In some instances, it may be possible to set up a HSA plan so that there is a higher amount set aside for executives and the owners of the business than for more junior employees so that all employees can benefit but the business owner and executives might benefit more. On the other hand, it is important to discuss this issue carefully with the HSA provider when setting up the plan in order to ensure that you are not potentially running afoul of the CRA. Although there may be no hard and fast limits to what amount can be set aside for a business owner relative to his salary, it cannot be an open chequebook.

J. No Exclusions For Pre-Existing Conditions

Some traditional benefit plans may refuse to provide coverage for pre-existing conditions. A HSA has no such issues.

Potential Drawbacks

A. Insufficient Coverage For High Expense Employees

The most obvious downside to a HSA compared to a traditional benefits plan occurs when the employee has medical expenses well in excess of their HSA limit. In such cases, if the medical expenses are of a short duration, then perhaps the employee would still win in the long run through a HSA during more typical years. If the employee has chronically high expenses, then this is another story. Although the employer may still benefit by choosing a HSA, since coverage is capped at the amount contributed for that employee that year and the employer does not have to worry about increases to insurance premiums that come about when employees make a lot of claims under traditional plans, the employees would ultimately suffer. In the case of prescription drugs, provinces like B.C. and Ontario have a drug plan that subsidizes covered medication after the employee has paid a set amount per year towards these expenses out of their own pocket. In B.C., it is the “Fair Pharmacare” Program.

Unfortunately, that may not cover all potential medical expenses. Accordingly, it is possible for the employer to also provide a special type of extended benefits plan that only kicks in under extreme situations after the employee has already spent a predetermined amount towards medical expenses. In the end, this is something that needs to be discussed before proceeding with a HSA.

B. Travel Risk

One of the hidden benefits of traditional extended benefits packages is that they often include travel insurance, which can be a life saver for employees hurt while out of the country, even if only during that short trip across the border to get gas and groceries. Fortunately, most HSA providers also sell an “add on” travel insurance product that can cover this gap that is often extremely inexpensive. Accordingly, I strongly recommend exploring this option

C. Coverage Limits For Sole Proprietors And Unincorporated Business Owners.

If you work for yourself and are not incorporated, then there are hard limits to how much you can deduct under a HSA. First, this business must be your main source of employment and you must not receive more than $10,000 from other sources. If you are a sole proprietor, the limits are $1,500 for each of you and your spouse and $750 per dependent child. In other words, for a husband, wife and child, they can only deduct $3,750 per year. If you are not incorporated but have employees, the amount you can deduct will be limited to the coverage you provide to these employees.

Conclusion

Although they have been around for some time, HSA’s remain a secret to most business owners. Hopefully the information in this article change this reality and allow many more Canadians to provide cost-effective medical coverage for their families and employees so they have more money for the other things in life.

Colin S. Ritchie, BA.H. LL.B., CFP, CLU, TEP and FMA is a Vancouver-based fee-for-service lawyer and financial planner who does not sell investment or insurance, just advice. To find out more, visit his website at www.colinsritchie.com.