09

Sep

THE BASICS: HEALTH CARE SPENDING ACCOUNTS WHAT ARE THEY AND HOW DO THEY WORK?

Posted at 10 months ago in blog by M Lederman

As opposed to a traditional insurance arrangement, an HSA allows an owner to provide an allotment for eligible medical expenses on a tax free basis to the employee. There are a whole host of covered expenses, expanding even beyond what you would expect from a traditional group insurance plan. It is a flexible and transparent arrangement, and is often offered as a “top up” in conjunction with traditional insurance.

Funding and claiming expenses is very simple. For example, say a business owner decides to give each employee $1,000/year in their HSA. An employee will then go to the pharmacy, dentist or practitioner (massage or physiotherapy are very common) and pay out of pocket. They can then submit this claim to be reimbursed fully including any tax, the business is direct billed for the amount, and the business can claim 100% tax deduction on the expense. Administrators generally charge a one time set up fee and a percentage of claim amounts (often in the range of 10%).

WHO IS ALLOWED TO HAVE ONE?

For incorporated businesses, the owner and any employees are eligible (even if there is only one employee!). The plan cannot be set up for shareholders only unless they are legitimate employees earning a salary. It is meant to be offered by owners to employees in order to show tax benefits, not to be put in place for owners to reduce expenses. If unincoporated, the business must have one arm’s length employee to qualify. In the case of a sole proprietor with no employees, CRA does not permit this arrangement and a traditional individual insurance plan is the preferred route (if you fall under this category, click here for a quick quote).

WHAT ARE THE PROS/CONS AS OPPOSED TO TRADITIONAL INSURANCE?

Let’s start with the Pros:

  • Flexible and Transparent
  • Cost certainty to employer
  • Rates do not change year after year based on usage – set dollar amount alloted
  • Employees can decide exactly where to spend money

And the Cons?:

  • No cost sharing to employer
  • Not technically insured – not covered for catastrophic events

This last point deserves attention. HSA’s are in vogue with a younger millennial workforce as they can spend their allotments how they want, however should an accident, illness or even death occur the allotment that satisfies routine dental and massage needs will be woefully inadequate. Insurance that pays out 2x salary (for example) in case of accident or death or replaces 66.6% of your salary until retirement age in the case of disability provides massive peace of mind to those with financial obligations. While many new age providers will denounce traditional insurance as costly and complicated, it provides far more concrete coverage and thus must be priced and adjudicated accordingly to ensure proper payouts.

There are many positive features to HSA arrangements, but make sure to know the details and differences as opposed to traditional plans. In the best case scenario, explore how they can work together…