Our team has sold hundreds of Healthcare Spending Accounts and in the process, we have done a lot of research into this great tool. Here are the top 4 questions about Healthcare Spending Accounts, which are commonly referred to as either HSAs or HCSAs, that we most often get.
1. What is a Healthcare Spending Account (HSA)?
A Healthcare Spending Account is an employee benefit that allows employers to reimburse employees for certain qualified health care expenses like prescription drugs or dental care. Any employee qualified health expenses reimbursed by the company are considered a deductible business expense. These same expenses are not added to the employee’s taxable income. As a result, HSAs are among other things, an employee benefit and a tax efficient form of compensation.
2. How do Healthcare Spending Accounts (HSA) work?
An employer would decide that they want to provide this tax efficient form of compensation to employees. It would have to be offered to all employees or a well-defined class of employees, for example managers and executives. The next decision would be to determine the maximum annual amount of reimbursement per employee. This must be established at the beginning of a plan year and in most cases, can only be changed on a plan anniversary. A typical amount is $500 per year but the accounts can be bigger or smaller.
Next, select a well established, reputable provider, who has good technology. Today, table stakes are on-line set-up, on-line administration and the ability to submit claims via smart phones and submitting health expenses by taking a picture of receipts and submitting them using your phone. These same providers will allow you to enrol your company on-line and will provide enrolment material to the individual employees on-line.
You will have to appoint a plan administrator to act as the point person. This is usually the owner of a small business or the human resource administrator for bigger businesses. As employees make claims, typically the administrator would receive notification that the funds need to be transferred into the Healthcare Spending Account to be paid out to employees to reimburse them for their qualified health care expenses.
3. How much does it cost?
Less than you would think. In most cases there is a small up-front set-up fee. Usually around $100. Additionally, there is a per claim administrative fee. Usually around 10%. Both the set-up fee and administrative fee vary by provider. In almost all cases, the on-line providers charge very reasonable set-up fees and provide excellent products and services. This is becoming a competitive market, driven by technology.
Typically, the combination of set-up fee and administration fee represent great value. Assuming a company of 5 employees, each with a $500 Healthcare Spending Account, with a $50 set up fee, the first-year cost would be, at most, 5 x $500 = $2,500 plus 10% administration = $2,500 + $250 + $50 = $2,800.
There are taxes associated with these accounts that vary by province. For example, in Ontario the taxes would be 8% Retail Sales Tax and 2% Premium Tax for a total of 10% tax. When budgeting, assume your employees will use about 80% of the account maximum, as not everyone will fully utilize the maximum provided to them.
4. What is your advice? What should I do?
Where we provide the most value to our clients is when we provide sound, reasonable advice. As with anything, one size does not fit all. Websites, written material and such, universally sing the praises of these accounts and promote Healthcare Spending Accounts as perfect for everyone as an ultra tax-efficient, super benefit that everyone should have. They aren’t.
For shareholders who are also employees, these accounts are terrific. Particularly during periods when family health care expenses are very high. HSAs allow owners who are both a shareholder and an employee to deduct these expenses as a legitimate employee benefit business expense, while not adding the amount reimbursed to their personal income.
For employees, any additional compensation is always appreciated and thus as part of an overall compensation package these extra dollars are deeply appreciated. We often recommend incorporating Healthcare Spending Accounts into an annual discussion about overall compensation. Rather than give your best and brightest a $1,500 raise in salary, consider a $1,500 raise, with $1,000 of salary and a $500 HSAs. After tax, they will have more income, as the $500 contribution to their HSA is not considered taxable income.
Having said all of this, establishing these accounts with a modest contribution level for employees represents a very low risk business decision that provides high bang for the buck when it comes to attracting and retaining great employees.