Beware of Choosing a Standalone Health Spending Account (HSA) for Coverage
Health Spending Accounts (HSAs) are becoming increasingly common in employee benefit plans. They’re a straightforward, easy way to support your employees with coverage. However, they’re not always the best option to replace an employee benefits plan (sometimes called a “standalone Health Spending Account.”)
What is a Health Spending Account?
A health spending account (commonly known as an HSA) acts like a bank account that employees can access to be reimbursed for eligible health and dental expenses. As the employer, you choose how much each employee gets in their account for each year. When the employee or their family incurs an eligible expense (as determined by the Canada Revenue Agency), they pay for it out of pocket, and then they submit their receipt to the benefit provider and are reimbursed for the expense. When the account gets to zero, they are no longer reimbursed.
The money you put in an employee’s health spending account is a tax-deductible business expense.
Enhancing employee benefit plans with health spending accounts
Typically, employee benefits plans are a type of insurance. You, as the employer, pay premiums that cover claims for healthcare expenses made by your employees. Employee benefit plans usually provide comprehensive coverage for things like prescription drugs, vision care, paramedical services, disability coverage, accident and serious illness and more. They’re a great way to support your employees and their families.
Health spending accounts are often best used to enhance or supplement an employee benefits plan. For example, often benefit plans have maximums and deductibles, or they can be limited when it comes to some expense categories. This is where a health spending account can be a great additional piece: the health spending account can be used to cover deductibles, amounts over a maximum allowable and more obscure expenses. They’re a great way to complete the coverage you’re providing.
Why a standalone HSA may not be adequate
The appeal of health spending accounts is clear: they give employees flexibility on how to spend their health benefit “dollars”, while employers understand the maximum that will be spent, while also getting a tax break. But health spending accounts only address one aspect of employee benefits, and there are times when an HSA may not even address the most important aspect: protection.
- Big risks go unaddressedA well-built employee benefit plan should support the whole health and wellbeing of employees and their families. Benefits are there when times get tough, or when the unthinkable happens. As a type of insurance, you’re paying for someone else to assume the risk and provide compensation in the case of an illness, accident, disability, or death (depending on the plan).Take a minute to think about if what would happen if one of your employees was diagnosed with a critical illness. If the only employee benefit you’ve provided is access to a health spending account, it just wouldn’t be enough. That employee would unfortunately very quickly deplete the health spending account, and then what? Who covers their expenses? If your goal was to support your employee, especially during challenging times, a health spending account on its own would come up short.
- Unpredictable CashflowHSA-only employee benefits plan can have unpredictable and difficult to manage the impact on an organization’s cash flow. Depending upon how the standalone health spending account is set up, employers may find that they’re responsible for paying for employee’s health expenses all at once: perhaps right at the beginning of the year, when you’re not sure what your revenue looks like, or at the end when cash is particularly tight.
- Employee incentivesOften employee benefit plans are most effective when employees have “skin in the game:” even nominal “co-pays” or sharing premium costs encourages employees to invest in the financial sustainability of their employee benefits plan. Standalone HSAs are entirely employer-paid, and so employees may not feel the same sense of ownership to choose lower-cost, equivalent health options or to prevent plan abuse.
- No ongoing supportA health spending account on its own can only be used to pay eligible expenses – those expenses approved by the Canada Revenue Agency. But most employees are going to need more support than basic health expenses. For example, access to an employee and family assistance plan ensures that employees and their family members receive ongoing support and resources (for example, counselling) that helps protect and improve their mental wellbeing. Other important services are also excluded, like disability management services, which helps both employees and employers navigate disability-related absences from work, with the goal of getting the employee back to work quickly and safely.
A great component of an employee benefits plan
With house insurance, you insure the whole house – not just one room. If you purchased house insurance for your bedroom only and there was a fire in the kitchen, you wouldn’t be covered. In some ways, employee benefits work this way as well. You should look for comprehensive coverage for all areas of employee benefits, instead of covering one small “room.”
There’s no doubt that a health spending account is a very valuable method of delivering employee benefits coverage. For most employers, it’s a great component, or addition, to an employee benefits plan. Used alone, a health spending account is unlikely to be adequate to fully support employees and their families.
Good Advice is Key
Are you thinking of adding a health spending account to your plan? Were you considering offering a standalone health spending account? Our Advisor Partners can help you understand the full story, and build a plan that can accommodate many different budgets and needs. Review your options with one of our licensed advisors on the phone, or contact us for a comparison quote.