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Well, who would have thought that my posts regarding Consumer Driven Healthcare would spark so many calls and e-mails. Since a blog is an ongoing story that is forever being written, I don’t always get the chance to write every detail. Over time, this will change as I add more and more content - I can only type so much in a day.
One of the e-mails I received asked if I believed that Consumer-driven healthcare could work without insurance. The answer of course is no. If you had the chance to read my article in Benefits Canada this month, I provided some options for Canadian companies to use the US-model of delivering CDH with the use of a Health and Welfare Trust (HWT). In the article, I suggested that companies offer an Health Spending Account in the form of an HWT as a replacement to traditional insurance for predictable claims. An HSA is an ideal funding model to cover predictable claims, the ones you know your employees will incur and therefore you have no need to insure for the event. After all, nobody would ever consider buying gas insurance for their car so why would you pay a premium for your annual dental cleaning.
However, I cannot stress enough the importance of insurance for the unpredictable. That is, after all, why we buy insurance. If anyone thought that I suggested we abandon insurance and go to a cash-savings model only, I apologize. What I wanted to stress is that the decision making on how premiums are paid and what they are paid for should be part of the decision making process of the consumer. Maybe not immediately, but certainly down the road once the support network is in place to educate and inform consumers to make sensible choices. The key issue at hand is the ability for consumers to make choices and spend their money in a more sensible manner. Buying insurance for the unpredictable claims and using their HSA for the predictable is money spent, in a sensible manner.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
PHSPs With No Limits
If you are a sole-proprietor, you can open a Private Health Services Plan through most third-party administrators and insurers to finance your healthcare costs as well as insurance premiums. Most sole-proprietors are individuals (i.e. tradespeople, lawyers, hairstylists, etc..) while some are employee groups (i.e. smaller retailers, professional firms, etc..) One problem that is causing grief is the growing number of HSA Providers offering PHSPs to sole-proprietors and NOT following the rules in terms of contribution limits.
If you are a sole-proprietor (unincorporated), you may qualify for a PHSP up to an annual maximum depending on the structure of your family ($1,500 / sole proprietor, $1,500 / dependent over 18 years old, $ 750 / dependent under 18 years old). Some HSA providers have ignored this rule, clearly defined in IT-339R2 (Meaning of Private Health Services Plan). This can be a problem for small business owners with a PHSP. One, you may be placing more claims through an administrator than you are allowed to claim on your return, costing you more money in administration fees to the HSA provider. Secondly, your deduction may be offside if you are offering a PHSP to your employees as an unincorporated entity. So, what should you do?
First, look at your existing deposit schedule versus claims and compare this amount to the logical maximum you would be entitled to with a PHSP. If you are above the maximum, you should speak with your HSA Provider regarding options for reducing the amount. If you have employees, it is important to note that their funds should be residing in a Health and Welfare Trust and not a PHSP. Secondly, you should remember that as owner - you may only deduct your PHSP contribution or the amount of the smallest contribution made to an employee, whatever is lower. Many HSA Providers forget this and the last thing you want is an auditor pointing this policy out to you.
In summary, PHSPs are great as long as you follow the rules. When choosing an HSA Provider, be sure to ask them about their policy on PHSP maximums and over-funding. If you have a group, ask them how they structure their plans to accomodate multi-employee HWT requirements. If they are confused by your questions….buyer beware!!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Many readers would argue that this is the number one benefit of having a Health Spending Account. Others will say it is the tax-savings. Personally, I would agree with the Flexible Spending crowd on this one.
In case you did not know, Health Spending Accounts cover a wide range of services and procedures - far more than any insurance plan on the market today. While an HSA is technically an insurance plan in the eyes of Canada Revenue Agency (CRA), it follows a claiming schedule designed for tax deduction purposes as opposed to caps or maximums based on general insurance risk and claiming patterns. To clarify, think of your traditional health insurance plan from Manulife or Sun Life. The plan has maximums for things like prescription drugs, massage therapy visits, and private duty nursing. These caps or maximums are tied to the premium you pay. The lower the maximum or allowance for each item, the lower the premium you pay - similar to the deductible on your car insurance and the price you pay in premiums.
A Health Spending Account on the other hand has no plan design and the items you can claim for reimbursement are at the discretion of the owner - as long as you have sufficient funds in the account and the claim is considered eligible by CRA. The rules for claiming come from Canada Revenue Agency’s interpretation bulletin IT-519R2 Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction. In addition to covering the basic items (drugs, therapy, dental, etc..) the funds can also be used to pay for many of the items insurance plans refuse to cover - such as smoking cessation, fertility drugs, elective surgery, cosmetic surgery, special needs schooling and more…
The key advantage is that you dictate the amount you want to spend and what you want to cover, not your insurance provider. If you or your employer decide to deposit $1,200 into your Private Health Services Plan (PHSP) or Health and Welfare Trust (HWT), you can spend it all on one service (such as massage therapy) or on a variety of services for you and your family. The flexibility of the HSA means that you have complete control over what you spend and when you spend it - a true advantage. For more information on claiming, feel free to view our making claims information page here at HSACanada.com.
On the weekend, my business partner and I went to establish new bank accounts for Gremolata. We had a 2:00pm appointment and I was assured that all I had to do was show up, sign some documents, and be done - max 5-10 minutes. I can be so naive sometimes.
Of course, it turned into a flood of paperwork, documents, signatures, witnesses, initials, duplicates, and authorizations just to give the bank our money. Now I understand that the bank wants to limit their liability and to protect the interests of the client but the process was certainly not customer-focused. This has always puzzled me about the banking and insurance industries…why do they make it so difficult to give them your money?
I have worked in several industries outside of the finance and insurance world and I have yet to find one where paperwork and multiple forms are so rampant. The health insurance industry in particular is filled with paperwork and forms. I have always believed in making the sign-up experience as painless as possible for the customer. After all, why would you make the process for a customer to give your their money so tedious that they would consider not following through. At Benecaid, we are always trying to reduce paperwork and automate the process because we believe that the barrier to accessing our products should never be the paperwork involved with purchase. I wish more companies in our industry would follow this philosophy. It would have reduced my level of frustration with the bank on Saturday.
What a week for the markets with yesterday being the biggest drop in 7 years for the Toronto Stock Exchange (TSX). And as I type this, people on Wall Street and Bay Street are panicking, waiting for the bell to see what will happen in the US. So far this morning, the Fed unexpectedly cut interest rates by 75 basis points and U.S. Treasury Secretary Henry Paulson, spoke to the US Chamber about the need for Congress to agree quickly on a package of tax cuts and other measures to boost the economy. Everybody is nervous - especially those with Health “Savings” Accounts south of the border. Some of our US counterparts have their HSA money invested in a wide variety of funds and equities. It is one thing to loose $500 in one day on a bad stock bet. It is another thing when that $500 was to pay for your diabetes medication!
Luckily, I live in Canada. My Health and Welfare Trust does not earn interest for me and I cannot invest the funds. It sits in the account, through good times and bad times, waiting for me to make a claim. The only thing bothering me today is my retirement fund…it is getting battered to pieces. But I have invested in solid companies…so I know they will come back. They always do. So I will sit back, relax, and hope that my HSA colleagues south of the border can afford their medication by the time the bell rings this evening.
A new report from the Employee Benefit Research Institute (EBRI) claims that the consumer-driven healthcare model is doomed. The report states that ”should health education initiatives prove ineffective, the ‘consumer-driven health movement’ could well be doomed, especially if it relies upon fully educated health consumers taking self-initiated actions.” The report goes on to say that consumers lack the education to fully understand their plan. “They have not been taught to speak up to health care providers, to be partners in their own health coverage and care,” states the report. Nor do they know what to expect in connection with the finances of health benefits or healthcare.”
While I am sure everyone agrees that communication is key to the success of consumer-driven plans, I disagree with the statement that they are doomed. Consumer-driven plans using HSAs can easily be compared to investments and savings in the early 80s. Up until the early 80’s most people required a stock broker to buy and sell stock on their behalf. Mutual Funds existed, but few people understood how they worked or how to participate. Many people had a defined-benefit pension, but nobody understood how the money was managed and invested. Consumer access to information was scarce and the ability to enhance personal wealth through investing was limited to the few. However, over time the market access expanded, information became more readily available, and consumers became more savvy. It did not happen overnight and it took several product failures before the investment industry found the right products and tools to turn personal wealth and investing into a consumer-driven product. But it still happened.
Today, very few people would have difficulty identifying and explaining the features of an RRSP, a Mutual Fund, or a GIC. Likewise, they would probably have one already in place and be making regular contributions. A growing number may even self-manage their portfolio on-line and access information and resources from a variety of Web sites and cable channels such as BNN or CNBC. Now, don’t get me wrong, I am not saying that everyone should rely on CNBC for their investment advice. What I am trying to explain is that the investment industry shifted from being a consumer-excluding to a consumer-driven one over the past two-three decades and I think consumers would agree that it worked out for the better. The same holds true for health benefit programs.
One could argue that the health benefits industry is behind other industries due to the relationship plan sponsors have played over the past few years in doing the work for their employees. When consumers are not forced to make decisions and find information, the support tools for the industry never evolve. Nobody would have envisioned twenty years ago that consumers could access real-time stock quotes and perform on-line stock trading without a broker. We never would have imagined self-directed RRSPs or “day-trading”. Why should it be so difficult for the health benefits industry to evolve as well? Plan Sponsors accepted defined-contribution plans, and turned their employees into consumers. Perhaps we need to step back and let the industry evolve? Who knows…20 years from now a Health Spending Account could be as basic a savings vehicle as a chequing account.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Fund Management
When you open an account with an HSA provider, you need to be certain that the funds are being deposited into a secure and reliable account. The last thing you need is an HSA provider poorly managing your money. As I have said before, beware of those companies looking to make a quick buck with little respect for the interpretation bulletins issued by Canada Revenue Agency.
Health and Welfare Trust (HWT)
A Health and Welfare Trust must always be set-up in a custodial trust account in the name of the owner. Some HSA providers operate their own trusts while others use a third-party (like CIBC Mellon, TD, etc..). These trusts must be managed by third-party trustees and the funds may only be released from these accounts with the approval of the trustee for eligible medical expenses. When evaluating an HSA provider, feel free to ask them where the trust is established. If they operate their own trust or use a third-party, do some investigating on the account and their practices. This can be done through the Office of the Superintendent of Financial Institutions (OSFI). If the trust company is legitimate, they will be regulated by OSFI and their Web site offers great resources to determine the stability of the trust company being used.
Private Health Services Plans (PHSP)
PHSPs are most often managed using dedicated bank accounts. A good PHSP provider should have a dedicated bank account established with a Tier 1 institution exclusively for the funds held for a client’s PHSP. They should never be deposited into a firm’s operating account. A few years back, I heard of a major HSA provider in Canada depositing PHSP funds into their operating account (i.e. the same account used to pay their own business expenses). I was shocked to hear this! Always ask your provider where the funds reside!
General Policies/Procedures
Whether you have a Health and Welfare Trust or a Private Health Services Plan, your provider should always have a statement of financial responsibility available for you on demand. This statement should be signed by the firm’s Director of Finance or CFO and provide information on where the funds are held, how the accounts are structured, and the processes and procedures they use to ensure your deposits are managed in a responsible manner. The statement may also provide the name of their auditor and their general accounting procedures.
In summary, remember to consider fund management as an important evaluation tool in choosing an HSA provider. If they are reluctant to disclose the procedures and suppliers….buyer beware!!
The Canadian Taxpayers Federation, with the help of the CD Howe Institute, released a tax-proposal for the federal government this morning entitled Lower, Simpler, Faster - Towards a single tax rate for Canada. The proposal recommends the federal government embark on comprehensive tax reform with the goal of adopting a single personal tax rate. As an immediate first step, the authors (Mark Milke & John Williamson) recommend that Canada move to two federal income tax rates of 15% and 25% by 2012. There are currently four tax rates of 29%, 26%, 22% and 15%.
Their proposal also called for a decrease in the number of deductions available to Canadians. While they noted medical expenses as a deduction, I was disappointed to see less emphasis placed on reforming the current medical tax credit. The CTF plan proposes a generous personal exemption, stating that “Basic personal exemptions should be set at a generous level to exclude those with the lowest incomes and ensure the tax system remains progressive“. Supporters of the HSA could argue that the CTF proposal would have more support from other lobby groups (and the voting public) if it balanced their tax model with more sensible deductions.
A workforce with more money in their pockets is only beneficial if they are healthy and can produce. While I agree with the report, one could argue that the replacement of the medical tax credit with some of the HSA policies outlined in the US Medicare Modernization Act might prove to be an additional benefit. Allowing every Canadian to have access to an HSA and deduct it from their personal income taxes like an RRSP would be a good step forward to keeping Canadians healthier, and not just wealthier. While I understand the CTF proposal was focused on tax and not deductions, I certainly hope we see more discussion in Ottawa regarding the US-model for Health “Savings” Accounts as tax-savings vehicle to promote healthier and wealthier citizens.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Administration Fees
Every HSA provider charges an administration fee for managing your health spending account. But what is reasonable and what should you look for in choosing the right HSA provider? To make a sensible decision, you should look at the different fees being charged and the pros and cons of each.
Administration Fee
Most HSA providers charge an administration fee. These fees tend to be in the range of 10% and 13% of deposits or claims. If you pay more than 13%, you should look elsewhere as there are many lower-cost alternatives. The fee is generally used to adjudicate your claims and manage the funds. Some HSA suppliers charge the admin fee on deposits while other charge it on claims reimbursed. Both models have their advantages. The first one takes the admin fee off on deposit, so you do not have to worry about it later when you make claims. The later charges you the admin fee each time you make a claim. They both end up costing the same, so not something to worry about - it is simply a personal preference.
Account Set-up Fee
Some HSA providers charge an account set-up fee. These fees can be as high as $300.00 simply to gain access to an account. These providers also charge an administration fee on deposits or claims. In my opinion, there is no need for a company to charge you an account set-up fee if they are charging you an administration fee - it is simply a cash grab. If you are opening an HSA for the first time, and you are unsure if it will be beneficial, I would strongly recommend using a provider that does not charge an account set-up fee. You are wasting your money!
Cheque Processing Fees
These fees are usually issued when a reimbursement cheque is issued (these fees average between $3.00-$4.00 with most HSA providers). The fee is applied to the batch of fees and not each claim. These fees cover postage requirements, cheque processing, and related charges to the trust account or bank account - depending on if you have a Health and Welfare Trust (HWT) or a Private Health Services Plan (PHSP) respectively. If a provider charges a cheque processing fee, the first thing you should look at is their admin fee. If they are charging 12% or more in admin fee, then they should not be charging you a cheque processing fee. You should never be asked to pay more than $4.00 for a cheque processing fee - the math simply does not justify it.
In summary, when choosing an HSA provider, you need to consider the fees and what works best for you. Try to avoid account set-up fees whenever possible. If you pay an admin fee, ensure that the cheque processing fee is reasonable. the lower the admin fee, the more acceptable the cheque processing fee. If the admin fee is high (over 12%) and they charge a cheque processing fee as well, look elsewhere.
I was watching the news this evening and saw yet another story about Corey Worthington Delaney, the Australian 16 year old who hosted 500 guests at his suburban Melbourne home. Sounds like a fun event until you learn that it took a host of police to break it up and caused $20,000 in damage. Now please believe me. If I was his father and I finally got my hands on him, it would take 12 Swiss surgeons to surgically remove those “signature yellow sunglasses” off the remains of what used to be his head. But the marketer inside me with a message to share has to say…bravo!
Now I am not condoning what he did, however, it does demonstrate the power of the internet and media in today’s world. In marketing, bad publicity can sometimes be as effective as good publicity - if it gets your message out. Corey’s party was promoted with zero cost using his mySpace page. He did not have to pay anyone to come, and he certainly did not need to issue a press release to get the media to cover his story. He made the spotlight on every major news network globally, using the internet. I wonder if Bill Gates is giggling at home while watching the news this evening.
My blog is devoted to Health Spending Accounts and I have decided to use this medium as a way to cost-effectively share my message to the world. Sure, I have questioned if it will be an effective medium. However, when I see the results of a 16 year-old, a mySpace page, and a desire to throw a little party for his friends - I start to realize the true power of the internet to share a message. I just hope my blog is a bit more useful for my readers out there.
Of course, if all else fails, I guess I could always cash $20,000 in stocks and get some Aussie to throw an HSA party for me!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Tax savings. I wasn’t going to add this to my blog as I assumed everyone understood this as a benefit by now. But in thinking about my posts, I wanted to ensure everyone had clarity on ALL of the benefits of a health spending account, so here we go…
When an incorporated business opens a health and welfare trust (HWT) for one employee or numerous employees, the total amount (including the administrative fees) becomes an eligible business deduction for the company - just like paper for the copier, pens, staples, or materials. It comes off the books as an expense and the impact on taxes would be the same as any other accepted expense.
For sole-proprietors, the contributions are also an eligible expense. If it is one individual with no employees, the amount deposited into their private health services plan is declared on their annual return. In almost all cases, the amount provides greater tax relief than the standard medical tax credit they would traditionally apply for. For groups, the amount deposited into each employees health and welfare trust would be considered a straight deduction similar to incorporated entities and declared along with the owner’s PHSP on their annual return.
Another opportunity for tax savings is related to salary and total compensation. Some companies incorporate an HSA into the total compensation of their employees by amending the salary to include an amount to be deposited into a Health and Welfare Trust. For example, if an employee earns $80,000 and they agree to receive a portion in HSA contribution (say $10,000/year), the employees taxable income would reduce to $70,000 and they would receive $10,000 in tax-free earnings into their HSA. The benefit for the employer is that the $10,000 becomes a business expense and the source deductions owed by the employer on behalf of the employee would be reduced from a percentage of $80,000 to one of $70,000.
Either way, the key tax savings benefit is that the HSA allows you to pay for your expenses in pre-tax dollars as opposed to after tax dollars.
In recent years, I have seen a growing number of Health Spending Account solutions appear in the market. Some are great and I applaud those providers who have done their research and developed a product that is respectful of the interpretation bulletins published by Canada Revenue Agency (CRA). However, a growing number of companies have entered the market in recent years looking to make a quick buck without truly investing in their knowledge of the product. To help, I thought I would start a new blog series…. items you should look for when choosing an HSA provider…
Unused Funds Being Returned to Company
Canada Revenue Agency is pretty clear on this issue - funds can NEVER revert back to the employer. The only time this can happen is when an HSA is used in a notional credit program combined with a flexible benefits plan. If you are working with a supplier and they allow you to take back unused funds from an employee if they quit, then you should re-evaluate your choice of supplier. Many of the new suppliers have taken the rules outlined in CRA bulletin IT-529 Flexible Employee Benefit Programs, and confused them with the guidelines outlined in IT-339R2 Meaning of Private Health Services Plan.
The guidelines outlined in the later bulletin, and to an extent those outlined in the original IT-85R2 Health and Welfare Trusts for Employees, are truly the best bulletins to follow regarding PHSPs and HWTs. The information in IT-529 is related to flexible benefit programs and provides an overview of how to account for benefits using a notional credit program. A notional credit program supports flexible benefits or cafeteria plans - common in many large corporations. Running a flexible benefits program using notional credits uses an HSA (in the form of a PHSP) in addition to a core plan offering varying levels of coverage for the employees to choose - traditionally as part of an annual election process.
In summary, funds can ONLY revert back to the employer if the program is part of a notional credit arrangement supporting a flexible benefits program. They belong to the employee! If you have a Private Health Services Plan or Health and Welfare Trust where the supplier allows you to take back the money if an employee is terminated or leaves…..buyer beware!
I am often asked “why would anyone want to incorporate their business?”. I can understand the headache of more paperwork and reporting (I am living it right now), but what I cannot understand is why a business owner with an employee base would let incorporation stop them from truly benefiting from a health spending account.
For sole-proprietors, the only HSA available is a private health services plan or PHSP. If they are a small business with no employees, then it makes sense to stay unincorporated - unless their annual maximums do not meet their needs in terms of annual medical expenses. It is when a sole-proprietor has employees that the benefits of incorporation are revealed.
If a sole-proprietor has employees and wants to offer a health spending account to them, the employees would be eligible for a health and welfare trust (no limits, unlimited roll-over) while the business owner would be eligible for a private health services plan (caps on contributions, 2 years forfeiture of funds from date of deposit). But the real headache comes from the contribution limits for sole-proprietors in a group setting.
You see, the rules for unincorporated groups states that the business owner can only deposit as much into their PHSP as the smallest amount offered to their employees in an HWT. Let’s clarify this with an example…
A sole-proprietor (let’s call him Bob) has three employees, two salespeople and a receptionist, representing two employee classes in terms of compensation and role in the company. The two salespeople are entitled to a health and welfare trust of $1,200 a year and the receptionist is entitled to $800 a year. Bob has a wife and two dependent children under 18 years of age. In theory, Bob should be able to claim up to $4,500 each year in PHSP deposits (2x$1500 + 2x$750). However, because the receptionist is entitled to only $800, a year, Bob is now limited to the same amount, as she represents the lowest amount being deposited amongst employees. This means that Bob is losing out of $3,700 in HSA contributions each year.
The solution? Incorporation of course! If Bob incorporated the business, he could still deposit $1,200 and $800 into the salesperson’s and receptionist’s health and welfare trusts respectively. However, Bob would also be able to deposit whatever amount he wanted into an HWT for himself, as long as it was reasonable to his needs and role/position in the company. Anything perceived as excessive would be considered a shareholder benefit. Either way, he could at least deposit the full $4,500 he would have been entitled to as a sole-proprietor and receive an additional $3,700 business deduction - more than enough to cover the $250 Industry Canada Fee to incorporate.
I was at a cocktail party over the weekend and met another guest who happened to be an independent consultant. When I told her that I worked in the health insurance world, she went silent and looked as if she wanted to kill me! I noted the serious look on her face and said “Uh-oh, somebody better walk me to my car later..” She laughed, and apologized for the glare. She then explained herself..
It turned out that she did not have any prescription drug or dental coverage. She had applied to the three well-known carriers ( I won’t mention which ones specifically) and had been denied a suitable plan because of a pre-existing condition she had and the fact that she travels overseas frequently. The drugs she currently pays for, no matter what plan she selected, would never be covered. When she heard I worked in the health insurance world, she immediately wanted to give me a piece of her mind. That is, until I started to explain the concept of a health spending account.
In her situation, the HSA was the best solution. She had no problem getting travel insurance, but it would not cover the pre-existing conditions. That was the least of her concerns. What she wanted was a manner in which to pay for her day-to-day drug claims in a more cost-effective manner. Luckily, she was incorporated and was eligible for a health and welfare trust. Over a drink, we estimated her average drug costs each month (including her massage therapy and dental visits. At the end of the day, she needed a health and welfare trust worth about $200/month. While I could not calculate the exact savings on the spot I did explain that the total amount would be an eligible business expense for the corporation and tax-free for her to spend. Any overseas expenses related to her pre-existing condition would also be eligible as expenses from her health spending account - an added perk. While she thought that was impressive, she was really more excited about the fact she did not require the medical!
I thought I would shed some light on the growing movement in the US regarding consumer-driven healthcare. Each weekend, I read my Sunday New York Times. Over the past few years, I have noticed an ever increasing volume of content related to Health “Savings” Accounts as the driving force behind consumer-driven health care. Recently, the topic has started to surface in Canada as well. In fact, I have an article on this very topic in the upcoming edition of Benefits Canada - be sure to check it out! (Sorry about the gratuitous plug on my work!)
The controversy in the US over consumer-driven healthcare comes from the growing trend of large corporations pushing the decision making process for health spending into the hands of their employees. In doing this, many corporations have decided to offer their employees a Health Savings Account with a high-deductible insurance product and abandon their fully-insured plan. The key driver is cost as an HSA offers greater budget certainty versus traditional insurance plans. Those who oppose the model claim that consumer-driven healthcare places too much power in the hands of the employee and that the employer no longer has any responsibility in their health and well-being. Those in favor of consumer-driven healthcare believe that the model is a more sensible approach as it allows the employee to tailor their health benefit program to the unique needs of their family as opposed to being presented with a canned plan designed to satisfy the needs of all employees. Either way, the trend has become major news in the US and the HSA industry south of the border is exploding as we speak. By what about Canada and other countries? Will they follow suit?
My upcoming Benefits Canada article (the January edition) outlines the differences between the Canadian Health “Spending” Account and the US Health “Savings” Account. It also examines the challenges and opportunities for Canadian companies interested in adopting a similar consumer-driven healthcare model as their contemporaries in the US. While I will not get into the details on this blog before the article is printed (I would prefer that you pick up a copy of the magazine), I will cover some of these similarities in future posts.
Why do people hold onto their claims for such a long time? Seriously, what is that about? When I pay for a claim out-of-pocket, I submit it to Benecaid as I have a Health and Welfare Trust with them. I submit the claim form and receipt within a week of incurring the claim - but I am apparently a minority.
You see, many people batch their claims and submit them at once. What is surprising is that many people actually submit their claims once a year, sometimes for amounts exceeding $6,000! I scratch my head in amazement every time I hear this, especially if you consider the following.
Let’s say you have an HSA and make $6,000 a year in claims. For arguments sake, we will assume that you incur the same amount each month in healthcare expenses, $500. Most people batch their claims to save the cheque processing and postage fees (these average between $3.00-$4.00 at most administrators). However, if they sent them in each month, the maximum amount they would incur in fees would be $48.00/year, and that amount is being a bit aggressive. While we all like to save money, the issue here is that claims receipts have no interest bearing value - they are not making you any money while sitting in a shoebox. Or worse, the original costs are causing you to place other household expenditures onto a credit card each month and carrying a long-term balance. In which case the interest charged means that you are loosing money!
But let’s pretend that you have a big wad of cash under the mattress at home and do not need a credit card. If you submitted your claims monthly and deposited your $500/month reimbursement cheques into a RRSP at 3%/year, you would make $102.30 in one year and receive the tax deduction of $6,000 for registered savings. A year later, that amount would be worth $6,285.00 and in ten years, that initial deposit could be worth $8,200.00!! More than enough to pay for the $48.00 in fees but more importantly, you are putting your money to work for you and not letting it sit in some form of debt or non-interest bearing vehicle!
So, enjoy the tax savings from your HSA but please remember to submit your expenses for reimbursement! The faster you get the money back, the faster you can put it to work reducing debt or building wealth! I don’t want to do an interest calculation on a credit card at 22% to get the point across folks!
In order to understand the benefits of an HSA versus the traditional Medical Tax Credit, I thought it would be valuable to provide some basic information on the credit. If you own a company, you pay yourself (and your employees if applicable) a salary for the work performed. This salary is subject to source deductions like CPP, EI, and income tax. What you have left, you use to finance your lifestyle and in many cases, pay for insurance premiums or out-of-pocket health expenses such as dental bills, prescriptions, or elective surgery. At the end of the year, you can declare these expenses on your annual tax return and apply for the medical tax credit. The medical tax credit is a non-refundable tax credit, meaning that it can only be used to reduce federal or provincial/territorial taxes to zero.
Taxpayer and Immediate Dependents
Medical expenses for the taxpayer, their spouse or common-law partner, and dependent children under 18 are claimed on line 330 of the federal tax return. Only expenses greater than the lesser of $1,925 or 3% of net income can be claimed. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.
“Other” Dependents
Medical expenses for other eligible dependents are claimed on line 331 and a separate calculation is done for each dependent. Only expenses greater than the lesser of $1,925 or 3% of net income of the dependent can be claimed, up to a maximum of $10,000 per dependent. The lowest tax rate is applied to the medical expenses to determine the amount of the tax credit you will receive.
The key difference between the HSA and the medical tax credit is that the HSA is a full-deduction for the business and 100% tax-free for the recipient (i.e. the employee). There are no thresholds for deduction by the company and the employee does not declare the deposits into the HSA as the amount is not considered to be income. The amount spent from the HSA on eligible medical expenses represents a true dollar value in tax-free benefit for the employee versus the amount received from the medical tax credit, which is only a portion of the actual cost. However, it is important to note that the HSA does not reduce overall personal income tax like the medical tax credit - unless it is paid in lieu of a portion of the employee’s normal salary. For example, if the employee earned $100,000 in 2007, the source deductions would reflect the amount owed based on $100,000. However if the employee’s compensation changed in 2008 to be $80,000 and the company deposited $20,000 into an HSA, then the source deductions would be reduced to reflect the amount owed on $80,000 as the $20,000 HSA contribution would be a tax-free benefit.
Every few weeks, I will be showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Taxes, we all have to pay them. Last week, I received all of my paperwork for the newly incorporated Gremolata Media Group Inc. What a stack of forms! Of course, one of the first things I noticed was the tax remittance forms…which made me think about the Health Spending Account and how simple it is to deduct as a business expense for the corporation.
If you own an incorporated entity, whether it is a global conglomerate or simply a corporation of one, you can open a Health and Welfare Trust (HWT) to cover your medical expenditures. If you are not incorporated, you can open a Private Health Services Plan or PHSP (see below). After my first wave of forms from CRA, I now understand why so many business owners love their HSA. Their is no annual paperwork! The deposits into the HSA are a business expense - nothing more, nothing less. You do not need to fill out any complex forms or ask for a special return from CRA, you simply add it as a debit to your books for the amount deposited into the employee’s health and welfare trust. The money is non-taxable for the employee, so you do not need to account for it on their compensation or make complex changes to their T4.
As for PHSPs, the story is a bit different. It is still a relatively easy process. On your annual return as an unincorporated sole-proprietor, you simply enter the amount you contributed into your PHSP on Line 9270 - Other Expenses.
When you think about it, the process is pretty simple. Certainly one of the easier items to report to CRA in terms of business expenses - versus mileage, leases, rent, interest earned/paid, or investments. So, why doesn’t everyone have an HSA??
OK, I had to do it. Three days into my blog and I have to write something about a celebrity. Anyways, I woke up this morning and the first thing I heard on the radio was Britney Spears being admitted to a hopsital after being rushed from her home by ambulance and escorted to Cedars Sinai by nine police cars. That’s right folks, nine police cars! While it did make for some interesting morning news with my Starbucks, the work-a-holic in me said…“Yikes…Who is paying the bill for this one?” .
If I was responsible for Ms. Spears’s personal health insurance policy, I would have been fired long ago. Of course, if she is financing this personally, the cost must be obscene! I did some research, and here is what this could have cost using some basic fee guidelines in California and advice from a doctor in Palo Alto…
Getting There…
- Cost for ambulance transportation varies by distance, typically $800-$1000
- Cost for police escort if available, no charge unless asked for and contracted as a special service in advance.
At the Hospital…
- For urgent, comprehensive evaluation by emergency physician: $500
- Hospital charges for nurse evaluation, use of the room: $500
- If an IV is needed: +$250
- Drugs vary widely and depend on whether the doctor orders a tradename drug or a generic preparation: $20 - $200 for drugs
- Observation time in the emergency department : $250/hour
- Evaluation by Psychiatrist in the ED: $300
- Costs for Psychiatric evaluation and counseling for 2-3 days…If an inpatient, then $250 per session for the psychiatrist
- Costs for private hospital room for 2-3 days, varies widely by hospital — $1,000-$3,000/day for the facility charges
- Average inpatient hospital stay in ICU ~ $8,000-10,000/day
Now, listen clearly. I am not saying that this is what she will experience over the next few days. However, if this was your typical visit to the hospital and you underwent what the media is reporting over a period of 2 days, then you would be looking at a bill somewhere between $29,000 and $32,000 USD!!!
My point here is that healthcare in the US is expensive, even for a celebrity. The second thing I would like to remind Canadians about is that not all of the bogus bill outlined above would be covered by medicare here in Canada. Many of these items, including private hospital rooms and even ambulance transport, would have been billed to your private insurance (if you had any). And if this was claimed through your insurance, you can be certain that by renewal time, you would receive some form of premium increase.
What would be more sensible? An HSA using tax-free dollars of course. All of the items listed above (excluding the police car envoy) would be covered as eligible expenses through an HSA in Canada (and the US). Even if the funds in the HSA did not cover the total amount, the claim could be rolled over to the next year and future funds used to reimburse Ms. Spears as they became available. But hopefully, this will be the last time she needs to endure such an expense.
In all seriousness, I certainly hope this is the last time I wake up to such a sad story about something so preventable.
For Canadians, the rising loonie has been a big news story for the past few months. Consumers are flocking south to take advantage of the at-par currency to buy cars, stereos, TVs, and clothing. But what about healthcare?
I was chatting with a friend of mine the other day and we were discussing the cost to attend some US-based high-profile wellness spa - you know, the ones the celebrities frequent. They had done some research and was surprised at how the cost was really no more than a basic all-inclusive stay at a 5-star resort. It got me thinking…“Is a week in Arizona at a medical wellness spa an option for me in 2008?”
I have a health spending account, actually, a Health and Welfare Trust (HWT) through Benecaid. I have barely used it (with the exception of some massage therapy and a new pair of glasses) and have saved up some considerable money. I certainly have enough for a week at Canyon Ranch or another medically licensed spa - should I take advantage of it?
A year ago, I would never have thought of spending my money on such a trip. However, with the recent rise in the loonie, I am seriously considering it. Given that the programs at these spas are overseen by medical professionals and that the transportation to and from the location would be eligible medical expenses, I am starting to think a medical getaway is right for me. I work hard and never take the time to look after myself. A week away focused on my physical and mental health and well-being might be a good choice in 2008.
I wonder how many other HSA holders are thinking the same thing?
The holidays may be over for many of us, but Private Health Services Plan (PHSP) season has just begun. Since PHSP contributions are declared on your annual personal taxes to Canada Revenue Agency, they are accounted for on an annual basis. The earlier in the year you start making contributions, the better off you are by year end.
For Example:
If you are a self-employed professional with a spouse or dependent over 18 years of age, the annual allowance for you to deposit into a PHSP would be 2 x $1500 or $3,000 in total. However, this is assuming that you started the plan in January. If you started the plan in July, you would only be allowed to claim for 6 months worth of contributions, or half of the $3,000 you deposited into the PHSP. You could still deposit the $3,000, but would only receive the tax relief of 6 months worth of access.
If you are an unincorporated sole-proprietor in Canada considering the idea of opening a Private Health Services Plan in 2008, now is the time to do so.
Every time I meet with a financial advisor, a lawyer, an accountant, or a potential Benecaid client, I am always asked the same thing…
What is an eligible claim?
Well, many different providers of HSAs have different interpretations on what CRA is trying to say. Medical expenses eligible to be paid out of the HSA (HWT or PHSP) are expenses which would otherwise qualify as medical expenses within section 118.2(2) of the Income Tax Act. The list is pretty long when you think about ALL the varying practitioners, procedures, and conditions out there. So here are a few simple rules to make it easier…
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Treatments MUST be performed by a Licensed Medical Practitioner.
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Products must be prescribed by a Licensed Medical Practitioner AND dispensed by a Licensed Pharmacist or Licensed Medical Practitioner.
Important!! Don’t forget that each province sets the guidelines as to what a Licensed Medical practitioner is! If the health profession has a college established granting registration numbers and certificates to each practitioner (like doctors, dentists, etc..), then chances are they are licensed.
Equally Important!! The Licensed Medical practitioner must be licensed in the jurisdiction of the HWT or PHSP account holder. What does that mean? Well, if you live in Alberta (where massage therapy is not regulated by a college) and visit Ontario (where it is considered a licensed medical practitioner), your claim should be rejected by your HSA administrator. Why? Because the service was not considered an eligible expense in your home jurisdiction. Think about that before your next holistic accu-aquatherapy-meditation trip to Bora Bora!
Well, January 1st, 2008 marked the start of another cut in the GST. Now standing at 5%, the reduced tax rate is designed to bring people back on board the consumer train and keep Canada out of a recession. Of course, the politicians will tell you it is a long-overdue break for Canadians, and that is true on many levels. Either way, the reduction in the GST rate is great, but I still wonder what impact it will have on small business owners besides being a headache for their accountant.
For HSA holders, the only perk is that the commonly charged service or administrative fee most HSA account holders are charged will be reduced by 1%. This means that on or after January 1st, all billings you receive from your HSA administrator should have the GST reduced by 1% - but don’t confuse this with the overall admin fee - it is just the taxes being adjusted.
It is January 2nd, 2008. My first day of work in a new year. A few months ago, I decided to start a blog about Health Spending Accounts or HSAs. Why? Well…
- I was growing frustrated with the lack of information available regarding HSAs within the Canadian marketplace. To this day it amazes me at how little the average Joe on the street understands of the greatest tax savings vehicles in this country!
- I wanted people to have access to an ongoing forum where news and information on the funding, claiming, and tax benefits could be shared and debated.
- To share my personal insight on the US and Canadian markets with a goal of clarifying certain misconceptions out there on how an HSA works and the related benefits.
The new year also starts the beginning of a new personal business venture of mine - sort of a “side thing” when I am not focused on HSAs. With this new adventure as a small business owner, the time was right for a blog. Given the benefits an HSA can bring to a frustrated small business owner suffering from rising benefit costs, I thought that my new business venture would give me some additional connections and insight into the minds of the entrepreneur.
On the other side of the coin, many benefits professionals are searching for more detailed analysis and support for implementing HSAs into their benefit programs. I understand these two needs for information and I hope my blogs will balance these two audiences adequately.
