The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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February 2007
HSAs In Canada – The Trend Towards DC-style Benefit Programs

By: James Geneau

In the pension world, every plan sponsor understands the rationale of moving from a Defined Benefit to a Defined Contribution model. While the debate over DC plans began in the 1960s, their mass adoption as a pension model truly ramped up in the 1990s as taxation rules changed and new technology was introduced to facilitate delivery and choice selection to larger employee groups.

While the DC model has been easily adopted by pension plan sponsors, only recently has the model started to gain popularity for the delivery of group health benefits.

For years, group health benefits have been tied to a defined plan design. Whether fully insured, or using an administrative service only (ASO) model, group health plans have always been controlled by a defined set of limits and benefits. With the rising costs of prescription drugs, the de-listing of services from the provincial governments, and a greater acceptance of paramedical services among employees, plan sponsors have been forced to modify their plan designs to control costs. In some cases, this has involved a reduction in annual limits, co-pay programs, or the implementation of tighter maximums.

For others, it has involved the removal of coverage from the plan or complete abandonment – a major source of friction between employers and employees. Only recently has a third option emerged, the movement towards a DC model for delivering group health benefits.

Funding Solution

In 1986, then-Finance Minister Paul Martin introduced a new funding solution for incorporated entities to provide health benefits. Outlined in a bulletin from Canada Revenue Agency (IT- 85R2), the concept for the Health and Welfare Trust (HWT) was born. In essence, the bulletin allowed Canadian corporations to deposit funds into a trust account for the tax-free benefit of an armʼs length designated recipient, such as employees, and claim the contribution as a business expense for the corporation. A third-party trustee was required to manage the trust. A few years later, after pressure from non-incorporated businesses, the government introduced another bulletin (IT-339R2) and the Private Health Services Plan (PHSP) was introduced.

A major benefit of the HWT and PHSP – flexibility in spending – took a back seat to tax savings for many years. Both funding models offer the same tax-deductible benefits for the contributor, however, the PHSP has limits in terms of annual contribution amounts and fund forfeiture after 24 months of initial deposit. In spite of these differences, both models have been intertwined in recent years as a common group benefits model, the Health Spending Account or HSA.

The HSA landed on the vocabulary of every plan sponsor when the ʻflex benefitsʼ model began to roll into every major company in Canada. Overnight, more and more companies started to offer a flexible range of plan designs where employees could purchase benefits using a credit or unfunded system. Eventually, RRSPs and HSAs appeared as ʻbank accountsʼ for an employee to deposit unspent credits. For many employees, the HSA was an excellent option for depositing excess credits to be used for health costs exceeding the limits of the plan design. Over time, employers started to offer HSAs as a retention tool for senior management above and beyond their traditional group benefits program.

HSAs

‘Total Compensation’ Trend

As the ʻtotal compensationʼ trend kicked into high-gear after Y2K, many plan sponsors found this to be an excellent vehicle for adding compensation without it bearing a taxable burden on the company or the employee.

However, in the past three years, activities in the United States have brought the HSA to the forefront as a core solution for delivering group health benefits. In the U.S., the HSA is referred to as a Health ʻSavingsʼ Account, with the difference in name being just the beginning in comparison to its Canadian counterpart.

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