Driving HSA Growth

Health Savings Accounts (HSAs) first began in the U.S. with the establishment of Medical Savings Accounts in 1996, followed by the implementation of Health Reimbursement Accounts in 2002. But the real catalyst for growth in this market was the passing of the Medicare Modernization Act in 2003. This Act created the HSA as a tax-free vehicle and made it available to employers of all sizes. Since then, HSAs have become a front-page news item in the U.S., and many of the U.S.’s largest employers, including Microsoft, Fujitsu Ltd., General Motors, Nokia and Daimler Chrysler, have made the switch to a consumer-driven model.

In the U.S., funds in an HSA can be invested, and earnings are sheltered from taxation until the funds are withdrawn. The account holder (the employee) does not have to obtain advance approval from the HSA trustee or medical insurer to withdraw funds. And if the funds are used to reimburse eligible medical expenses—which include deductibles and co-insurance, as well as many other expenses not covered under traditional medical plans—they are not subject to income tax.

The account holder is responsible for ensuring that claims are made only for eligible expenses and for keeping receipts on file to validate the claims in case of an audit. Since the responsibility for eligibility belongs to the account holder and not to a third-party trustee, many suppliers offer debit cards that allow the account holder to pay healthcare expenditures directly from his or her account.

Deposits to U.S. HSAs can be made by any policyholder, individual or corporate entity of a minimum-deductible health plan, by the employer or by any other person. However, the tax treatment depends on the contributor. Employers can contribute on behalf of employees on a pre-tax basis, and the main advantage of making pre-tax contributions is the Federal Insurance Contributions Act deduction. However, if the employee wishes to make additional contributions, he or she can only do so on a post-tax basis, and the post-tax funds will decrease the employee’s gross taxable income on the following year’s income tax Form 1040. Self-employed individuals must also pay self-employment tax on their contributions.

The Canadian Version

HSAs aren’t new to Canada (although here, they’re known as Health Spending Accounts, instead of Health Savings Accounts). Employers have been offering a form of HSA—the Private Health Services Plan (PHSP)—for many years as a means of differentiating their organizations from the competition. However, PHSPs have been offered on a limited basis in terms of deposit amounts and forfeiture of funds. Perhaps the closest Canadian equivalent to the U.S. HSA is the Health and Welfare Trust (HWT). Unlike a PHSP, with an HWT, there are no limits on the amount that an employee can receive within his or her account, as long as the amount is reasonable given the employee’s compensation and role within the organization. The funds can also be rolled over indefinitely—unlike a PHSP, in which the funds are lost 24 months after deposit if they are not used. These less restrictive plans are more in line with the benefits of the U.S. model; however, they are still relatively unknown within most Canadian corporations.

There are some definite advantages to implementing a consumer-driven healthcare model that includes an HSA. For example, it provides budget certainty for the employer— the cost of providing the benefit is fixed for each employee, but the employer can adjust it as necessary based on the company’s financial performance. It also empowers employees to make wiser and potentially more costeffective choices in their healthcare spending, since each employee has control over the decision-making process and how he or she spends the funds in the account. So why have Canadian employers been slow to adopt the more flexible and comprehensive U.S. model?

Cultural Differences

Part of the issue is the significant differences between how these models work in Canada versus in the U.S. While HSAs are widely available in the U.S., in Canada, the HWT is accessible only to incorporated companies and professionals, and accounts can only be opened for eligible employees of the corporation by an incorporated entity. Deposits must be made by the incorporated entity into each employee’s HWT. And, unlike the U.S. model, the funds in the account do not accumulate interest. However, the deposits are still taxfree for the employee (except for employees in Quebec) and constitute an eligible business deduction for the corporation.

There’s also a difference in how funds are reimbursed. While the guidelines issued by the Canada Revenue Agency are somewhat vague, most Canadian third-party administrators operate under a reimbursement-only model, meaning that the account holder incurs the initial expense and a reimbursement is subsequently made to him or her from the funds available in the account. The account holder cannot make his or her own assessment of whether or not the claim is eligible; a third-party administrator must adjudicate the claims. The rules for what constitutes an eligible claim are similar to those in the U.S. and include a wide range of healthcare services, as well as premiums and deductibles for consumer group health plans. Since the account is held in trust for the employee, the third-party trustee must release the funds.

Finally, while the U.S. model involves a high-deductible insurance product, in Canada, an HWT can be offered as a stand-alone benefit (i.e., neither the employer nor the recipient is required to have an insurance product tied to the account).

Risks and Rewards

If a Canadian employer wanted to implement a consumer-driven healthcare model, what would it look like? There are a couple of options. One, the employer could terminate its traditional group insurance plan and use the resulting cost savings to fund an HWT for employees. Employees would then have the option of purchasing an individual drug plan to cover any unforeseen costs. Two, the employer could retain its existing health plan, but scale it back to include only drug coverage, and establish an HWT to cover other predictable healthcare costs.

One possible drawback with the first model is the inherent risk. The employer can facilitate access to a group health insurance plan, and employees can use the funds in their accounts to reimburse premiums for the plan. However, since the employee owns the funds in the account, the employer can’t require the employee to purchase this insurance. There’s also the risk of employees using the funds improperly (i.e., not using the funds for eligible healthcare expenses), although the requirement to have a third-party adjudicate claims on a reimbursement-only basis helps minimize this risk.

Canadian companies have generally been hesitant to adopt a consumer-driven healthcare model—either due to a lack of understanding within the benefits community of how HWTs work or concerns about the potential risks associated with employees not purchasing insurance for unforeseen healthcare costs. But these risks can be mitigated through proper planning.

For example, the issue of protecting employees from unforeseen healthcare costs can be resolved in one of two ways. One, an employer can offer employees an HWT while paying the premiums for a highdeductible drug and hospital care insurance product separately. Two, if the employer wants to facilitate access to the insurance coverage with the employee using a portion of the HWT funds to pay the premium, it should ensure that the risks of not participating in the insurance coverage are properly communicated to employees. Employers should also engage the appropriate resources, including subject matter experts and labour lawyers, to ensure that they understand all of the issues associated with offering HWTs to employees.

HSAs Today and Tomorrow

While the risks and rewards are different in Canada than in the U.S., the consumer-driven model is still a viable and cost-effective option for many Canadian employers. Canadian rules for the HWT simplify the model and allow employers to maintain a stake in benefits delivery. The requirement to have a third-party adjudicate claims and release funds is another perk, as it ensures that the funds are being used for legitimate health expenditures.

For many employers, providing adequate health benefits is not simply a competitive strategy; it stems from a genuine desire to ensure that employees and their families remain healthy and available to perform for the company. However, the rising costs of delivering these programs year over year have put a strain on these values. Adopting a consumer-driven healthcare model with an HWT allows Canadian employers to manage costs and engage employees in the decision-making process while maintaining a degree of comfort that the funds will be used for what the employer desires most: the ongoing health and well-being of employees.

James Geneau is vice-president, marketing, with Benecaid Health Benefit Solutions. jgeneau@benecaid.com

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