Health and dental benefit cost-containment in these financially troubled times is of paramount importance to every employer, regardless of size or industry.
The traditional group insurance plan — incorporating annual compound premium rates — is becoming unaffordable for many employers. There needs to be a fundamental shift to how these benefits are provided.
Employees have to become part of the solution, rather than the cause of increasing claim costs. Few employees have any sense of the true cost of the benefits and many look at benefits as an entitlement, rather than a part of total compensation. Why should an employer pay two-and-a-half times the premium cost for an employee with a family versus a single employee? Where is the internal equity in the current cost structure?
Employers are seeking alternatives to the cost spiral. Many benefit plan providers are offering different versions of what is termed “cost-plus,” under which an employer pays a set-up fee, the actual cost of eligible medical or dental expenses, a handling fee of 10 per cent of the claim, plus applicable taxes.
These plans are considered private health services plans (PHSPs), as defined in the Income Tax Act, regulations and associated interpretation bulletins. However, in the eyes of the Canada Revenue Agency (CRA), many of these plans are not eligible business expenses.
Many cost-plus plans do not contain an element of risk, as required by the CRA and, therefore, do not qualify as a PHSP. Proponents of these plans have added “stop-loss” or “out-of-country” insurance, but this is not what CRA intended. In recent years, insurers have used arbitrary inflation and trend factors ranging from 15 per cent to 20 per cent or more when calculating renewal rates.
Large corporate employers have been able to self-insure benefit costs under an administrative services-only arrangement. While this may provide some degree of control over the inflation factors, employers will ultimately bear the full cost of the group’s claims experience, plus administrative costs and applicable taxes. They cannot walk away from the adverse claims experience, as is possible under an insured program.
Some employers have added a stop-loss insurance policy in an attempt to cap potential liability. However, if the stop-loss protection is based on an individual employee’s claims in excess of, say, $5,000 or $10,000 per policy year, it may not have any impact whatsoever.
Over the past 25 years, major employers introduced flex benefit plans in an effort to control costs. Under a true full-flex plan, literally every benefit component is subject to review and scrutiny, and employees are responsible for selecting benefits to match their personal needs.
A full-flex program usually involves increased benefit administration responsibilities and related costs and the need for more effective, ongoing employee communications. For the small- to medium-sized employer, a full-flex plan is often not a realistic or affordable option.
But there are alternatives, such as taking a defined contribution approach to health and dental benefits in the form of a health spending account (HSA). Under this arrangement a specific dollar amount per year, contributed monthly, is provided to all employees regardless of marital status.
The employer can vary the annual contribution by class of employee or any basis desired. Employees cannot contribute directly to the plan. However, the employee and employer, at the expiry of a contract of employment, can renegotiate the arrangement.
The medical expenses that can be claimed are much broader than permitted under any group benefits program. Benefits received from the HSA are not considered taxable income in the hands of employees (except in Quebec).
HSAs can be offered independent of any other health benefit. As the employer’s contribution is fixed on an annual basis, there is the risk some claims incurred by employees will not be paid because they exceed the amount available in the HSA. This is the element of insurance CRA requires. The employer can deduct contributions to the HSA as a business expense as it is a contribution to a PHSP.
A defined contribution approach that includes an HSA as the basic health and dental coverage, plus “catastrophic” top-up insurance protection for unexpected serious illness or disabilities, enable an employer to essentially freeze its cost for health and dental protection. And it provides internal equity among employees.
Under this approach there is no annual increase for inflation or trend, as under a traditional group program. The employer cost is only increased if the employer decides it can afford to do so. There is no increase because of actual paid claims, as employees can only claim up to the net amount after administration fees in their personal HSA account.
Scott Maclagan is president of Maclagan, a Markham, Ont.-based employee benefits consulting firm. He can be reached at (905) 554-0875, firstname.lastname@example.org or visit www.maclagan.ca for more information.