Health spending accounts for retirees

Allows for an additional retiree benefit where bonus dollars can be contributed

With the upcoming increase in retirements, the pending tightening of the labour market and the consequent loss of key skills, more companies are relying on retirees as a source of future labour and are looking for innovative ways to maintain positive relations with their retirees, including the offering of post retirement benefits.

As well, for organizations with traditional retiree benefits plan, retirees are often looking for increased flexibility while employers are looking for cost-effective ways to provide benefits. Due to this changing environment, health spending accounts (HSAs) have grown in popularity as a simple and cost-effective way for companies to offer retiree benefits.

As an additional benefit for retirees, many companies are also establishing policies to allow retirees to contribute pre-retirement bonuses into an HSA on a tax-free basis.

Take, for example, the case of Tom Smith (not his real name), a recently retired vice-president from a major Canadian corporation. After retirement, Smith purchased extended travel medical benefits so he can live six months of the year in Hawaii and six months of the year in Canada. Through his company’s retirement benefits, he is receiving a $1,000 HSA each year.

Prior to retirement, Smith also opted to have $10,000 of his bonus placed into his HSA on a tax-free basis. This gave Smith the flexibility to purchase extended travel medical benefits through his HSA and also provided him with funds for his in-country health cost.

The flexibility to apply the money in his HSA to extended travel health premiums was a very appealing aspect for Smith.
As well, the ability to contribute bonus dollars into his HSA saved him more than $4,000 in taxes.

Advantages for employers

There are many advantages to the employer for offering HSAs.

Competitive advantage: Offering an HSA to retirees helps broaden a company’s ability to access a new labour pool.

Cost control: The employer decides the amount to allocate to the retiree. Employers do not have to worry about premiums escalating or costs increasing on an annual basis.

As well, if the company is switching from a traditional retiree benefits program, an HSA can result in significant savings for the company.

Non-taxable: An HSA is a non-taxable benefit for employers which is a very attractive quality in offering  an HSA.

Simple: Traditional benefit plans have can be complex, particularly when co-ordinated with provincial senior programs.

An HSA is a simple way to provide the retiree with coverage that is easy to understand and administer.

Advantages for retirees
There are also many advantages for the retirees.

Great flexibility: Retirees have the flexibility to allocate benefit dollars to specific areas of eligible health costs that meet their needs.

Full reimbursement: One hundred per cent of eligible benefits claims are reimbursed up to the spending limit and there are no exclusions for pre-existing conditions.

Broader range of coverage: Under an HSA, a greater range of health and dental costs are eligible for coverage for the employee. Examples include eye surgery, dental crowns and emergency travel health insurance premiums.

An HSA can be used as a top-up plan: If a retiree has coverage through a provincial health program for seniors, or if their spouse has benefit coverage, any non-reimbursed amounts can be submitted to their HSA.

Works in combination with insured benefit plans: If a retiree wants an insured benefit plan, they can purchase a plan that is right for them and submit the premium amount to their HSA for reimbursement up to their spending limit.

Non-taxable: An HSA is a non-taxable benefit for retirees which is desirable for employees who don’t want to pay taxes on their retirement benefits.

Contributing bonus dollars into an HSA

Companies can allow employees to contribute bonus dollars into an HSA on a tax-free basis as long as certain criteria are met.
Under Tax Interpretation Bulletin IT-529, an HSA has been recognized by the Canadian Revenue Agency (CRA) as a type of Private Health Services Plan (PHSP).

As a PHSP under the income tax act, funds can be contributed by the employer towards these benefits on a tax-free basis. In order to be classified as a PHSP and non-taxable benefit to employees, some conditions must be met:

Use it or lose it: The dollars contributed to the HSA are considered to be employer dollars. If the money is not used within a certain time frame (two years is typical), then the money reverts back to the company. If unused dollars are paid directly to the employee/retiree from an HSA, the entire HSA plan is considered a taxable benefit. In the example of Smith, if he does not use the full $10,000 within a span of two years, the remainder reverts back to the company. Smith knew this prior to making his declaration and was able to plan how much he would need and what his bonus contribution to his HSA should be. 

Declared: Employees must designate the amount of bonus contribution in advance of payment. Typically, employees/retirees are given an option in advance of the annual bonus payout: They can either designate a fixed dollar amount up to a certain limit to their HSA or designate a percentage of the bonus to their HSA. In some cases, a declaration is made through a form in the employee retirement package that applies to bonuses paid to the retiree.

At risk: Funds cannot be guaranteed to the employee but must contain an element of risk. From a practical and general perspective, funds derived from an annual bonus tied to the company’s performance, accompanied by a two-year “use it or lose it” condition, have been determined to meet the criteria of risk by CRA.

As employers increasing rely on retirees as a labour pool for skill, the establishment of HSAs can provide a cost-effective competitive advantage to assist in maintaining relationships with retirees.

Overall, offering HSAs, along with an option to contribute bonus dollars on a pre-retirement basis, gives employers two powerful tools to address post-retirement benefit options.

Gerry Beitel is the president of Path Human Resources and Business Consulting in Calgary. He can be reached at [email protected].

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