Health spending accounts: A multifaceted, crowd-pleasing health insurance tool

Benefit gives employees more control over costs

HR analysts have been reporting for several years the Canadian workforce is on the verge of a crisis. Baby boomers are reaching retirement, there are fewer skilled workers to replace them and health-care expenses are increasing across all levels. In recent years, health spending accounts (HSAs) have become one solution to help reduce the negative impact of the changing employment landscape.

“HSAs have gained popularity among employers and employees alike, mainly because of their flexibility,” said Françoise Picard, product manager in the research and development department at Desjardins Financial Security’s group insurance division.

“Employers may use them as a leveraging tool when hiring in booming markets or in negotiations for executive positions. Employees feel empowered by the fact that they are in better control of their health benefit expenses.”

How do HSAs work?

HSAs work like a special savings account from which employees can pay for health or dental expenses that are not usually covered by their provincial or group insurance plans, as defined by the Canada Revenue Agency (CRA). At the start of a new year or a specified date (12 consecutive months), an employer will allocate a cash amount to each employee as stipulated in the contract with the insurance provider. This amount could also be a percentage of an employee’s salary, which is mostly associated with executive-level compensation packages.

The account balance will then reduce with each health expense claim submitted by an employee. The funds in an HSA can only be used in two consecutive periods or years. After this time, the remaining funds are lost.

There are two types of HSAs — the expense carry forward (ECF) or balance carry forward (BCF). An ECF HSA permits an employee to submit out-of-pocket eligible expenses from the previous year for payment in the subsequent year, or within the two-year allowable time frame.

A BCF allows for leftover HSA credits to be used the following year first, prior to the amounts allocated in the second year. In other words, the two amounts are not combined but used sequentially.

An HSA must follow strict CRA guidelines, particularly when it comes to how it is established and that it operates under a favourable tax status. There are also specific rules about how allocated funds are managed, grace period lengths and, most importantly, which medical expenses are applicable. To qualify, expenses must be listed as a medical expense tax credit under the federal income tax act.

Advantages for employers

The HSA is very attractive to employers because it’s a flexible, cost-effective and complete health benefit. The employer’s costs are defined within the contract and any required changes can be made by amending the contract. Payments can be made in advance or at the end of a year or contribution period.

Employers are also free to determine or change the account contribution schedule at the beginning of every calendar year. The HSA’s flexibility allows it to serve as a bargaining chip when recruiting talent or trying to retain competent employees.

Advantages for employees

Employees are empowered to make their own personal health-care purchase decisions based on whether they have an ECF or BCF HSA. This means their future costs are completely at their own discretion.

It can also be looked at as a type of non-taxable compensation reward or incentive. Employees can select how much to debit from their accounts to pay for each eligible expense, within the confines of their health spending account balance, the HSA contract and CRA guidelines. Plan members will receive a tax-free reimbursement for their eligible expenses. However in Quebec, these reimbursements are subject to provincial tax.

Finally, employees’ dollars have added spending power over and above their base medical and dental plans because their account funds are not subject to tax if used for qualified expenses.

The surge in popularity for the HSA is obvious, says Picard.

“Over the next 10 to 20 years, as the Canadian workforce continues to shrink and as medical expenses increase, employers will require new cost-efficient and flexible health-benefit tools,” she says. “This is an essential tool that is definitely a crowd-pleaser.”

Sarah Twomey is a communications advisor at Desjardins Group in Toronto. She can be reached at [email protected] or (416) 926-2700, ext. 2015.

Latest stories