Traditional concerns about tax implications and costs give way to rising employee demand
As health-care consumers are becoming more aware of alternative therapies such as naturopathy or traditional Chinese medicine, more and more employees are increasingly asking whether their company’s benefit plan will pay for these treatments.
The answer may depend on what type of coverage they have. Services could be covered by the company’s core benefit plan, a health spending account (HSA) or an employer-sponsored wellness initiative.
Medical plan coverage
In most cases, whether or not coverage is provided depends on the service. For most services not considered part of mainstream health care, the answer is often no. The reason has less to do with the reluctance on the part of employers and more to do with the law. Canada Revenue Agency (CRA) rules limit coverage provided by company-sponsored health care plans to treatments provided by provincially licensed practitioners.
Of course, employers may choose not to cover some therapies even though they do meet CRA requirements. Organizations may limit benefit plan coverage to treatments they believe offer the most therapeutic value, are of medical necessity and are accepted medical practice. While this is a rather subjective test, it’s also a fluid one. For instance, according to Hewitt’s SpecBook database of Canadian benefit programs, only 27 per cent of Canadian employers covered acupuncture services 10 years ago. Today, 68 per cent do.
The decision may also be based on cost. For instance, while massage therapy is often performed by a registered practitioner, employers may opt not to include it in their benefit programs because of the potential for significant use and, therefore, expense. In the case of services that have potential to be used for elective, non-medical reasons, employers are forced to balance the desire for coverage for their employees with the associated cost.
While legal and financial restrictions affect employers’ ability to cover alternative therapies in their core benefits program, they are listening to employee demands for flexibility. In an ever-tightening labour market, employers have no choice but to listen — and act. They do not want to lose a good worker to a competitor just because laser eye surgery was not covered in their medical plan.
Health spending accounts
This realization on the part of employers that they have to meet employee demands yet balance costs and abide by the law is not new. The first venture into an arrangement where employees could avail themselves of therapies outside of the core program was the health spending account. HSAs have now been around for more than 30 years.
HSAs enable employers to offer additional tax-free coverage for certain health-related expenses without increasing their own costs. At the beginning of the year, an allocation is made to a “spending account” for each employee. This allocation can be an amount from the employer above and beyond the core benefits plan and/or unused “flex credits” if the employer offers a flexible benefits program. The employee can use this money to purchase any service that falls within the definition of “medical expense” under the Income Tax Act. This would include prescription drugs, dental, vision, massage therapy and other paramedical services — expenses that are not covered by provincial health coverage or by a typical group plan.
Because these dollars are directed to the account before income tax is deducted, compensation provided through these accounts goes much further than if employees were to pay for health-related expenses themselves. Money deposited in HSAs is not considered income for tax purposes (except for Quebec provincial tax). CRA’s definition of a “dependant” also permits employees to cover expenses for extended family members.
There are CRA restrictions on what treatments or medications may be covered under the HSA. But, since the HSA contribution defines the amount the employer will spend, most employers do not have any restrictions on the services reimbursed as long as they meet the CRA definition. This provides an opportunity for employees to receive a broader range of treatments and services without having to pay for them using after-tax dollars.
Wellness accounts
Many employers wish to promote employee health and wellness beyond the scope of what the CRA allows under their core medical plan. They may choose to encourage healthy living not just for the employee’s sake but also because of the positive impact wellness can have on the bottom line.
Wellness accounts are a specific, formal, employer-sponsored wellness initiative. Individual expense accounts provide taxable reimbursement of certain eligible benefit expenses. Employees are given a set number of “wellness credits” to use for health-related treatment. Because employees receive these credits as an express element of their compensation, they are perhaps more inclined to use them. Wellness accounts are a more overt way of encouraging a healthy lifestyle.
The CRA is not involved when it comes to wellness initiatives as there is no tax saving accruing to the employee. Employers define what is covered and allowable expenses are reimbursed, up to specified limits, allowing employers to tailor a wellness account to cover the range of alternative therapies they would like to encourage. These expenses may include such things as fitness club memberships, personal trainer sessions, smoking cessation programs, weight loss programs or traditional Chinese treatments.
Because of their flexibility, wellness accounts are clearly increasing in popularity as employers attempt to provide more flexibility in coverage offered to employees. In Hewitt’s recent Attracting and Retaining the New Workforce survey, employers were asked whether they currently provide wellness accounts and if they expect to do so three years from now. The 232 respondents from across the country indicated they expected wellness accounts to increase in prevalence by 27 per cent over the next three years. Alberta employers in particular are expecting a tremendous upswing — a 51-per-cent increase in the popularity of wellness accounts by 2009.
Other tax-effective ways of covering alternative therapies
Employers are looking at even more tax-effective ways to offer maximum flexibility to employees for health-care coverage. For instance, thanks to recent favourable tax rulings, some employees may be able to defer all or part of their bonus to an HSA or convert it to flex dollars.
This option allows employees to use their income in a tax-effective manner and gives them the flexibility to cover the health and wellness expenses they choose. While not common among Canadian employers, this approach is likely to see substantial growth in the future as awareness of this tactic increases.
Regulatory restrictions coupled with a lack of awareness of “alternative” therapies may have limited employer coverage of certain treatments in the past. The need to keep rising health benefit costs under control contributed to employer reluctance to add any new coverage to the basic benefit plan. However, the labour crunch and employee demand are fueling current and future trends to cover a wider range of therapies under a variety of creative arrangements.
Tim Clarke is the Hewitt Associates’ benefits practice leader for Eastern Canada, working out of Hewitt’s Toronto office. He may be reached at [email protected].
The answer may depend on what type of coverage they have. Services could be covered by the company’s core benefit plan, a health spending account (HSA) or an employer-sponsored wellness initiative.
Medical plan coverage
In most cases, whether or not coverage is provided depends on the service. For most services not considered part of mainstream health care, the answer is often no. The reason has less to do with the reluctance on the part of employers and more to do with the law. Canada Revenue Agency (CRA) rules limit coverage provided by company-sponsored health care plans to treatments provided by provincially licensed practitioners.
Of course, employers may choose not to cover some therapies even though they do meet CRA requirements. Organizations may limit benefit plan coverage to treatments they believe offer the most therapeutic value, are of medical necessity and are accepted medical practice. While this is a rather subjective test, it’s also a fluid one. For instance, according to Hewitt’s SpecBook database of Canadian benefit programs, only 27 per cent of Canadian employers covered acupuncture services 10 years ago. Today, 68 per cent do.
The decision may also be based on cost. For instance, while massage therapy is often performed by a registered practitioner, employers may opt not to include it in their benefit programs because of the potential for significant use and, therefore, expense. In the case of services that have potential to be used for elective, non-medical reasons, employers are forced to balance the desire for coverage for their employees with the associated cost.
While legal and financial restrictions affect employers’ ability to cover alternative therapies in their core benefits program, they are listening to employee demands for flexibility. In an ever-tightening labour market, employers have no choice but to listen — and act. They do not want to lose a good worker to a competitor just because laser eye surgery was not covered in their medical plan.
Health spending accounts
This realization on the part of employers that they have to meet employee demands yet balance costs and abide by the law is not new. The first venture into an arrangement where employees could avail themselves of therapies outside of the core program was the health spending account. HSAs have now been around for more than 30 years.
HSAs enable employers to offer additional tax-free coverage for certain health-related expenses without increasing their own costs. At the beginning of the year, an allocation is made to a “spending account” for each employee. This allocation can be an amount from the employer above and beyond the core benefits plan and/or unused “flex credits” if the employer offers a flexible benefits program. The employee can use this money to purchase any service that falls within the definition of “medical expense” under the Income Tax Act. This would include prescription drugs, dental, vision, massage therapy and other paramedical services — expenses that are not covered by provincial health coverage or by a typical group plan.
Because these dollars are directed to the account before income tax is deducted, compensation provided through these accounts goes much further than if employees were to pay for health-related expenses themselves. Money deposited in HSAs is not considered income for tax purposes (except for Quebec provincial tax). CRA’s definition of a “dependant” also permits employees to cover expenses for extended family members.
There are CRA restrictions on what treatments or medications may be covered under the HSA. But, since the HSA contribution defines the amount the employer will spend, most employers do not have any restrictions on the services reimbursed as long as they meet the CRA definition. This provides an opportunity for employees to receive a broader range of treatments and services without having to pay for them using after-tax dollars.
Wellness accounts
Many employers wish to promote employee health and wellness beyond the scope of what the CRA allows under their core medical plan. They may choose to encourage healthy living not just for the employee’s sake but also because of the positive impact wellness can have on the bottom line.
Wellness accounts are a specific, formal, employer-sponsored wellness initiative. Individual expense accounts provide taxable reimbursement of certain eligible benefit expenses. Employees are given a set number of “wellness credits” to use for health-related treatment. Because employees receive these credits as an express element of their compensation, they are perhaps more inclined to use them. Wellness accounts are a more overt way of encouraging a healthy lifestyle.
The CRA is not involved when it comes to wellness initiatives as there is no tax saving accruing to the employee. Employers define what is covered and allowable expenses are reimbursed, up to specified limits, allowing employers to tailor a wellness account to cover the range of alternative therapies they would like to encourage. These expenses may include such things as fitness club memberships, personal trainer sessions, smoking cessation programs, weight loss programs or traditional Chinese treatments.
Because of their flexibility, wellness accounts are clearly increasing in popularity as employers attempt to provide more flexibility in coverage offered to employees. In Hewitt’s recent Attracting and Retaining the New Workforce survey, employers were asked whether they currently provide wellness accounts and if they expect to do so three years from now. The 232 respondents from across the country indicated they expected wellness accounts to increase in prevalence by 27 per cent over the next three years. Alberta employers in particular are expecting a tremendous upswing — a 51-per-cent increase in the popularity of wellness accounts by 2009.
Other tax-effective ways of covering alternative therapies
Employers are looking at even more tax-effective ways to offer maximum flexibility to employees for health-care coverage. For instance, thanks to recent favourable tax rulings, some employees may be able to defer all or part of their bonus to an HSA or convert it to flex dollars.
This option allows employees to use their income in a tax-effective manner and gives them the flexibility to cover the health and wellness expenses they choose. While not common among Canadian employers, this approach is likely to see substantial growth in the future as awareness of this tactic increases.
Regulatory restrictions coupled with a lack of awareness of “alternative” therapies may have limited employer coverage of certain treatments in the past. The need to keep rising health benefit costs under control contributed to employer reluctance to add any new coverage to the basic benefit plan. However, the labour crunch and employee demand are fueling current and future trends to cover a wider range of therapies under a variety of creative arrangements.
Tim Clarke is the Hewitt Associates’ benefits practice leader for Eastern Canada, working out of Hewitt’s Toronto office. He may be reached at [email protected].
