|
© Copyright 2000 Rogers Media. The following article first appeared in the January 2001 edition of
BENEFITS CANADA magazine.
Benefits for sale
Health spending accounts give plan members more control over their benefits. Plan sponsors can use
them as an attraction and retention tool or to reduce costs.
By Tracy Unger Mozill
Taking care of employees from the cradle to the grave may once have been the paternalistic philosophy plan
members expected from their employers. But this certainly isn't appealing to the current generation of
empowered and mobile plan members. In fact, most employees today are looking for a greater degree of
control and flexibility in their benefits plan.
The shift towards more employee control over benefits needn't translate into the heavy administrative
burden of a full flexible benefits plan. Health spending accounts (HSAs), for example, can offer a
significant degree of flexibility without the complex and costly administration of a full flex plan.
HSAs may also be adapted to help plan sponsors meet some of the major challenges they face today, including
attracting new employees and cost-shifting as the public health system erodes and the cost of prescription
drugs climbs. In fact, an HSA can be used in a variety of situations, from a simple plan enhancement to the
total replacement of a conventional healthcare plan.
HSAs are one way of delivering a private health services plan to pay medical and dental expenses in a
tax-effective manner. Like the more conventional group health and dental plans, HSAs are regulated by the
Income Tax Act. Unlike conventional plans, however, HSAs generally reimburse 100% of all allowable expenses
for a broad range of dependents with the only maximum being the dollar limit of the HSA.
Overall, these spending accounts are a simple concept. At the beginning of each year, the employer deposits
money into an HSA for the employee who then uses this money to pay for eligible medical and dental expenses
that are not covered under a group plan (either the employee's or spouse's) or the provincial medical plan.
Funds used to pay for eligible expenses are non-taxable to the employee. Quebec residents, however, are
taxed at the provincial level on funds used to pay for eligible expenses.
To retain tax-free status, the unused balance in an HSA can be rolled over at the end of the year but it
cannot be taken out in cash. At the end of the second year, if the employee hasn't used the first-year's
balance, those funds revert back to the employer.
To remain a tax-deductible business expense, the employer must use the funds to pay for employee benefits.
Although carrying forward unused funds is a more popular option, employers may choose to carry forward
claims (rather than funds) to the second year.
HSA ADVANTAGES
From both the plan sponsor and employee perspective, HSAs have several advantages over conventional
healthcare plans. The advantages to the employer are:
-
The cost of the program is known and can be budgeted for from year to year (similar to comparing a
defined contribution plan to a defined benefit pension plan).
-
The flexibility of an HSA can soften the impact of employee cost-sharing.
-
There are no renewals, reserves or inflation factors to contend with.
-
Flexibility and control for plan members translates into employee satisfaction and hopefully loyalty.
-
Because dollars in an HSA are limited, employees are more accountable and are motivated to spend
wisely.
The advantages to the employee include:
-
An HSA covers a broader range of expenses than a conventional healthcare plan.
-
It reimburses expenses for a wider range of dependents.
-
Employees have more flexibility and control than with conventional health and dental plans.
-
As compared to receiving a salary, employees are not taxed on any money paid from the HSA to reimburse
expenses (with the exception of Quebec residents as noted earlier).
For employees, the broad range of eligible expenses are considered the biggest advantage of an HSA. The
real employee advantage, however, comes from being able to pay for items that are excluded or limited under
a conventional plan. These items include:
-
Portions of expenses not reimbursed under a conventional group plan such as co-insurance amounts,
deductibles and amounts exceeding the plan maximum.
-
Insurance premiums paid by the employee or the individual's spouse for private health and dental plans.
-
Cosmetic medical and dental treatment.
-
Over-the-counter drugs, provided they are prescribed by a physician.
-
Drugs for conditions sometimes excluded under conventional plans such as erectile dysfunction,
fertility, obesity and hair loss.
-
Laser eye surgery.
-
Professional services of a dietician, acupuncturist or Christian Science practitioner.
This list includes only a few of the more common expenses included in an extensive list of eligible
expenses as defined under the Income Tax Act. A complete list of eligible expenses is available online at
www.rc.gc.ca (the Canada Customs and Revenue Agency Web site) under forms and publications.
As baby boomers age, an increasing number of employees find themselves financially responsible for parents
and grandparents. With the ever-expanding definition of family comes financial responsibility for an
increasing array of dependents. HSAs can help ease this burden by reimbursing expenses for a range of
dependents.
In addition to the employee's spouse and dependent children, funds in an HSA can also be used to cover
expenses for another relative who resides in Canada at any time during the year, for whom the employee is
claiming a tax credit that year. This individual must be the plan member's parent, grandparent, grandchild,
brother, sister, uncle, aunt, niece or nephew.
According to Canada Customs and Revenue Agency, funds deposited into an HSA must come from the employer.
Although the funds must come from the plan sponsor, there is a variety of options for funding. They
include:
-
An increase in the organization's budget to enhance employee benefits.
-
An employer making a contribution to an HSA but reducing other benefits, such as co-insurance payments
from 100% to 80%.
-
Changes in cost-sharing arrangements so that employees pay the healthcare premium and the employer
contributes an equal amount to an HSA.
-
An option for the employee annual bonus.
-
An employer providing an HSA in lieu of a raise.
-
Reducing salary to fund the HSA. However, since a salary reduction negatively affects other benefits
such as disability benefits, Canada Pension Plan, Quebec Pension Plan and the company pension, this is
generally not recommended.
DIVERSE ROLES
Health spending accounts are not a panacea for all that ails employer-sponsored healthcare plans. But
structured properly, they can help solve some of the problems. As anything from a simple add-on to the
total replacement of a conventional plan, HSAs can play many roles.
In a competitive environment where recruiting and retaining employees is a major challenge, an HSA is an
attractive addition to a benefits plan providing that the plan sponsor's budget permits an increase in
employee benefits spending. From the employee's perspective, this is the ideal situation for an HSA. They
gain flexibility and control without giving up anything in return.
With annual inflationary increases in healthcare plans running between 14% and 17% and rising, many
employers need to see some cost containment and cost-shifting. Prescription drugs are the natural target
for cost containment because they represent both the bulk of the expenditures under healthcare plans and
the majority of the increase in cost. HSAs can be useful in controlling--and also shifting to
employees--prescription drug costs.
By replacing the prescription drug portion of a conventional healthcare plan with an HSA, the plan sponsor
controls the amount spent on prescription drugs. A less radical alternative is to switch to a controlled
drug formulary (with drugs added or deleted only as approved by a provincial formulary or determined in
plan design) for the conventional plan and add an HSA for drugs not on the formulary.
Conditional drug formularies add new drugs only if they have a therapeutic advantage over existing products
and only cover drugs for the condition they were approved. An HSA may also be used in conjunction with a
conditional drug formulary to lessen the blow of cost shifting.
As we look at the cost of drugs soon to reach the Canadian market (for example, rheumatoid arthritis
medications at $17,000 per person, per year) and emerging drug trends expected in the areas of
biotechnology and gene technology, these approaches have considerable merit.
On the more extreme end of the spectrum, an HSA can replace an entire conventional health and dental plan
with the addition of a high-deductible insurance plan to cover the catastrophes.
Structured properly, this plan design can add flexibility, control or shift costs while still providing
insurance coverage to prevent catastrophic personal expenses.
THE OUTCOME
Employers choose to implement an HSA to achieve certain objectives, whether it's to help attract workers or
reduce the organization's costs. Although plan sponsors can never predict the result of their efforts with
absolute certainty, an awareness of possible outcomes will help them make the best decision.
If the HSA is an open plan reimbursing the maximum allowed under a private health services plan, employers
may lose some of the employee cost-sharing features. Plan members can claim their co-insurance/co-pay
amount, deductibles, any amount exceeding the plan maximum and premiums. However, the dollar maximum of an
HSA may still encourage employees to spend wisely.
When employers decide to control the amount they are prepared to reimburse for new drugs by implementing a
controlled formulary and reimbursing new drugs only through the HSA, any costs that exceed the HSA balance
are the responsibility of the employee.
The downside of this approach occurs when the organization inadvertently excludes or limits reimbursement
on a drug that allows an employee to remain actively at work. Organizations could easily lose far more in
costs associated with absenteeism than the cost of the drug.
At first glance, plan sponsors would expect their costs to decrease when they switch from a conventional
healthcare plan to a high-deductible catastrophe plan and an HSA. In reality, however, this might not
happen because an open HSA covers far more than a conventional plan.
If employers include expenses they didn't reimburse under the conventional plan (co-insurance, deductibles,
amounts exceeding plan maximums, premiums, excluded expenses) when calculating the deductible for the
insured plan, these items may actually increase the organization's benefits-related costs.
When determining whether an HSA is the right fit for the organization, the first step is to examine
corporate objectives. What is the philosophical approach to employee benefits? Do employees expect and want
their plan sponsor to take care of all their healthcare needs, or are they looking for more flexibility and
control? Who will pay for the cost of employee benefits now and in the future? Is the organization's
objective benefit enhancement or cost control?
As with any change, communication is critical. It's important to let employees know what benefits cost and
what the expectations are for future costs. If cost shifting is inevitable, plan sponsors need to let
members know that. The feedback from employees will be invaluable in determining the best plan design to
meet both their objectives and those of the organization.
Tracy Unger Mozill is manager of marketing communications with Co-operators Life Insurance Company in
Calgary. tracy_ungermozill@cooperators.ca.
|
News
News
