With an ever growing increase in popularity, it's important for business owners to understand what exactly a health care spending account is and how they can incorporate it into their current compensation and benefits package.
So what exactly is a health care spending account?
A health care spending account is a popular title given to an amount of money contributed to an employee on behalf of an employer for the purposes of medical and dental expenses. The employer will utilize a third party service to set up a limit and approve expenses. These accounts typically have a limit starting at around $500 per year. The third party will charge an administration fee on claims ran through the account that can range anywhere from 5% to 15%. Sometimes these will be actual accounts where the employee will receive a card and be able to access the account at the point of sale. Or, it may be a reimbursement arrangement, where the employer will reimburse the employee up to a set limit for their expenses. This could range anywhere from an employee submitting receipts to an employer and waiting for a third party to issue them a cheque, or, submitting their expenses online and being reimbursed by direct deposit into their account.
Health Care Spending Account is the most popular terminology used for this type of strategy, however, you may also hear the term "Cost Plus". Either way, they all fall under the umbrella of a Private Health Services Plan in the Income Tax Act. Under this definition an employer is allowed to allot a certain dollar amount that employees can use for spending on medical expenses traditionally covered under a group benefits plan.
Click here for the CRA's interpretation of a Private Health Services Plan
More great tax resources surrounding Private Health Services Plans
Always keep in mind that while there are many providers offering this type of product, at the end of the day you are responsible for any type of deduction you claim while filing your taxes. Tax interpretations can change and the providers of these products will not back you should you have any issues revolving around tax issues that may arise from you having used this strategy.
Health Care Spending Account Myths
A health care spending account is cheaper than a traditional benefit plan.
Often I hear this comment, it isn't necessarily false on all counts but the statement is far to matter of fact for my liking.
If you are to strictly analyze the administration fees charged by a health care spending account versus those of a traditional experience rated benefit plan then their may be some truth to the statement. The highest fees you'll likely pay through a health care spending account provider would be around 15% whereas some of the administration fees insurers will receive through target loss ratios can be upwards of 35 to 40%. Apples to apples this could offer a significant savings, that being said there is almost no way to make an apples to apples comparison.
First off, you have to understand that when you talk about the cost of a health care spending account vs a traditional insured benefit plan you are comparing two completely different things. One is an insurance product and one isn't. It would be the equivalent of saying the average fender bender costs a vehicle owner $2500. So by that logic it would be cheaper in the long run to save up $2500 in an account then to pay for my vehicle insurance at $120 per month every year. Insurance has coverage for the unexpected costs that can be catastrophic. Only until you need that coverage would you be able to see the true cost of forgoing the insurance.
You also have to consider that it's very common for an employer to split the cost of benefits with the staff. With a health care spending account this is not an option. So lets say you're deciding between offering your 4 employees and their families a traditional benefit plan with a premium of $300 per employee per month or giving them each a $2500 health care spending account. If the employer were to pay 100% of the cost, the health care spending account would be more cost effective considering a $10,000 potential bill vs. a $14,400 bill with the traditional benefit plan. Now, take into consideration that the benefit plan was split 50/50 with the employees and now you have a $10,000 potential bill vs a $7,200 bill. Even if your employees only use 75% of that $10,000 account you're still more cost effective with the traditional benefit plan. There are many other factors to consider here but this is just an example.
I don't need to use a health care spending account, we just reimburse our employees directly for their medical costs.
Can this be done? Technically yes, however, for this to qualify as a private health services plan it would need to be included in the employment contract as to exactly how this arrangement is to work. This contract would have to be professionally drafted ensuring that all parties are treated fairly. Since most employers don't have this done they are not in compliance with a private health services plan and therefor technically should not be claiming any deduction for reimbursement of medical expenses.
Another reason I don't feel this to be an adequate solution is that I don't believe that an employee should have to show their employer or plan administrator copies of their personal medical information for reimbursement. I also don't feel that this is equal to all staff as employees dealing with sensitive conditions or an issue they feel to be embarrassing may opt not to submit their receipts for reimbursement.
The Hybrid Plan
I'm not in any way opposed to health care spending accounts . That being said, it's important to understand that it's not a matter of arguing whether a health care spending account is better than insured plan but rather which plan is going to work better in your unique scenario. This brings me to the area where my company does a lot of it's work; the hybrid plan.
We like this style of funding because it really is the best of both worlds. We use a traditionally insured plan for areas where insurance is important, ie disability, life insurance, extended health care. Then we use a health care spending account for expenses where they would have a cap regardless of whether they were insured or not. ie. dental, massage, chiropractor, vision.
It allows employers to split the cost with employees where the employees pay a portion of insured plan and the employer funds the health care spending account.
Employees like that they have the flexibility of being able to spend the health care spending account as they see fit. Perhaps they use it all for vision in the first year, then they use it for orthodontics in the second.
There also may be a situation where your staff don't qualify for a traditional benefit plan, perhaps they are seasonal or your industry is too risky. In this situation we can cover the employees who qualify for traditional benefits with an insured plan and cover the rest of the staff with a health care spending account so that no one has to go without.
The biggest question when determining the implementation of a health care spending account is "how much do I give for each employee". This is a tough question because it ultimately comes down to: whatever you are comfortable with. Keeping in mind that the minimum allocation is typically $500 per employee my suggestions is usually to give a $1000 to $1500 allocation to single employees and anywhere between $2000 and $3000 for employees with families. I have found this to be a good average with some finding it far more than enough and some finding it doesn't come close to what they require. But at the end of the day that's just part of employing this type of strategy, there is no one size fits all amount.
What is the Best Third Party Provider to Use?
This is very difficult to say as there are likely an infinite amount of third party providers to use so it goes without saying that I haven't had experience with all of them. The two companies I use most are Quikcard and MyHSA. I use Quikcard in situations where employees are used to using cards, perhaps they've used a traditional benefit plan in the past. O,r maybe there are employees that aren't tech savvy so using an app or online admin portal is out of the question. I use MyHSA in situations where employees for the most part are using smart phones and can access the app or are comfortable with making online claims. As far as reliability both companies are excellent with paying claims in a timely manner and employee satisfaction is high with both.