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

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June 2007

The Healthcare Spending Account Alternative

By: Robert J. Crowder

Healthcare Spending Accounts (HCSAs) have become a popular alternative to traditional group health and dental plans. They are practical, affordable, flexible, and a cost-effective way to meet the changing needs of many employers and diverse needs of their employees.

Many employers are considering HCSAs as an alternative when reviewing or initiating their employee benefits plan. It is important to take the time to understand the ins and outs of HCSAs to determine if they are an appropriate solution.

How HCSAs Work

Healthcare Spending Accounts are pre-determined amounts of money provided to employees at the beginning of each benefit year for coverage of their medical and dental expenses.

This amount is held in trust and claims are submitted by employees and reimbursed in a similar fashion to a traditional benefits plan. Eligible expenses are reimbursed at 100 per cent up to the total dollar amount available in the HCSA. A Healthcare Spending Account can replace or exist alongside traditional medical and dental coverage.

These accounts ensure controlled benefit costs for the employer and complete claim flexibility for the employees.

At the beginning of each benefit year, the plan sponsor determines the amount of HCSA dollars available in each employeeʼs individual account (normally by class of employee). For example, executives could receive $5,000 per year and all other employees $1,000 per year.

Healthcare spending

Employees and their families can then claim from these accounts to cover Canada Revenue Agency (CRA) approved health and dental expenses, which they encounter throughout the benefit year. This allows flexibility for employees to claim the expenses which are unique to their own families, rather than restricting them to the dollar limits and specific expenses an employer may set out in a traditional benefits plan. One employee can replace his glasses and another can pay for their childrenʼs orthodontics.

Under the Income Tax Act, any item that qualifies for the Medical Tax Credit is eligible for coverage through an HCSA. Often this definition of eligible expenses is broader than that of a traditional employee benefits plan, allowing for additional flexibility for employees and executives in particular.

Tax Advantages

Healthcare Spending Accounts provide a way for plan sponsors to deliver benefits to their employees using pre-tax dollars. As with a traditional employee benefits plan, an HCSA is a private health services plan. The plan cost is a tax-deductible business expense and the benefits are received tax-free. This can be a significant advantage for owners, executives, and key employees as they can pay for significant medical and dental expenses with corporate dollars in the most tax effective way possible.

To be considered a tax-deductible expense to the plan sponsor, an HCSA must be a preset limit which is 100 per cent employer funded. The funds cannot be used to purchase additional insurance such as life insurance. The amount of reimbursement is limited to the amount allocated to the account by the employer and to the eligible expenses defined in the Income Tax Act. Funding Under the terms of the Income Tax Act, to qualify as a tax-deductible expense to the company, HCSAs must be fully funded by the employer. These amounts can be billed on a monthly basis, rather than requiring a large lump sum payment at the beginning of the benefit year. This budgeted approach is particularly effective for small companies that require predictable expenses each month. In some instances, such as with an executive HCSA, annual contributions may be billed at a specified date each calendar year.

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