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Benefits and Pensions MonitorHSAs In Canada – The Trend Towards DC-style Benefit ProgramsFirst off, the HSA in the U.S. acts like a true savings vehicle open to individual consumers with contributions being taxfree. However, the funds can accumulate interest, unlike the Canadian model. The major difference is the requirement of a high-deductible insurance product to complement the account. The annual amount an individual can deposit into their HSA and claim as a tax deduction is based on the greater of the annual insurance deductible, up to a maximum of $2,700 per single and $5,450 per family. The owner of the HSA can invest the funds. However, the account must be their only source of insurance. This is a new concept in the U.S., first started in 1996 with the establishment of Medical Savings Accounts, followed by Health Reimbursement Accounts (HRAs) by the IRS in 2002. However, the real catalyst for the recent activity was the passage in 2003 of the Medicare Modernization Act. Since 2003, the HSA has been a front page news item in the U.S. with many companies jumping aboard. In a country where the cost of healthcare is a speeding train with no brakes, many corporations have come to a crossing point due to the pressure the plans have placed on profitability and shareholder confidence. This has given rise to a growing number of companies moving towards the DC model for their group health benefits program, with the mechanism being the HSA. In the past two years, U.S. companies have been giving their employees more of a stake in their healthcare spending with the hope that they will make wiser, price-sensitive choices in their spending. To date, companies such as Microsoft, Fujitsu Ltd., General Motors, Nokia, and Daimler Chrysler have implemented the DC model for their U.S.-based employees through an HSA. Budget Certainty The model has allowed the employer to offer a benefit to their employees while achieving budget certainty. With many HR managers using a percentage of payroll versus head count for budgeting, the defined HSA contribution amount is the first standard outside of the traditional group insurance premium suitable for budgeting. However, unlike insurance premiums, the HSA contribution can be fixed by the employer, not an insurance provider. By passing the cost of the high-deductible insurance to the employee, U.S. employers can control their benefit costs through the defined annual contribution they budget for their employeeʼs HSA. The decision power and control of the benefit is now in the hands of the employee allowing the employer to complete their obligation in delivering the benefit without direct liability for the performance of the plan and coverage. For U.S. employees, the benefits are numerous. The main advantage of a highdeductible insurance plan is that it reduces, in most cases, the monthly premiums paid by the employee. Many U.S. employers offer it to their employees as a lower-cost option to comprehensive insurance. For the HSA, the advantage is the taxsavings. In the U.S., the money can be invested and grow tax-free. Considering the funds are tax-free to withdraw for eligible medical expenses, many analysts have stated that the HSA is superior to a 401(k). Since the U.S. model is designed to act as a long-term savings vehicle, the HSA can be funded to cover post-retirement health benefits. Back in Canada, the model is very different. In the past, the growth of HSAs has focused primarily on unfunded credits or cost-plus hybrids. Only recently has the Health and Welfare Trust or HWT started to gain momentum. The issue for many HSA plans on the market today is funding. Currently, CRA advises that “contributions to the fund must not exceed the amounts required to provide these benefits. Furthermore, the payments by the employer cannot be made on a voluntary or gratuitous basis.” An actuarial study can facilitate overfunding over a given time horizon, provided it demonstrates the need for the funds to cover costs in the future. Unfortunately, many unfunded cost-plus products have surfaced in the past 10 years marketed as PHSPs or HSAs. It is the skepticism of cost-plus by the accounting and HR professionals in Canada that has seen more and more employers moving towards the HWT model. The key benefits of the HWT for the employer are the fixed contribution amount and budget certainty. The HWT is an excellent alternative for the employer faced with rising insurance premiums, lower employee appreciation, and a desire to be an employer of choice in their industry. The employer can fund the employeeʼs HWT at a fixed amount each year and increase contributions annually along with inflation or a defined tier of compensation classes unique to their organization. Since CRA stipulates that the funds can never revert back to the employer, most employers choose to fund the HWT on a monthly basis to promote employee retention. Greater Choice For the employee, the HWT provides a tax-free benefit and greater choice in where they spend their healthcare dollars. For those employees looking for added security for the unforeseen, the funds in the HSA can be used to pay premiums to a group insurance plan, similar to the U.S. model. The current Canadian model provides many of the same benefits as its U.S. counterpart. With the growing concern among Canadian employers regarding increasing drug costs, budget certainty, and employee retention, health benefit programs will continue to be a growing issue of concern in the coming years. To accommodate fiscal and employee obligations, more and more employers will move towards the funded health and welfare trust as a core solution to facilitate greater cost-control, obtain budget certainty, and increased appreciation from employees for their plan. ■
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James Geneau is vicepresident of marketing at Benecaid, an administrator of HSA and ASO health plans within the Canadian market.