Written by Dave Stewart
Many small business owners are faced with a difficult decision relating to health benefits for their employees… purchase them for their employees in the hope it gives them a competitive advantage relating to employee recruitment, employee retention & overall employee satisfaction… or don’t purchase them for their employees and hope that this competitive disadvantage doesn’t cause too much turmoil and turnover with their employees.
The leading reason I hear from small business owners as to why they don’t purchase health benefits for their employees is the cost. Most insurance companies offer a breadth of coverage that most employees will not come close to using and also most of the coverage is bundled, meaning the business owner must take all or leave all. Nonetheless, with the current employment culture of 2023, small business owners need to offer some sort of health option to their employees. One major deciding factor as to where people choose to work is whether the employer has a competitive Health Benefits plan. Canadians are more likely to leave their jobs for ones that offer better benefit plans as they experience lower levels of overall well-being and declining mental health.
However, there is an alternative to the traditional Workplace Health Benefits plan, and it is called a Health Spending Account (or HSA for short).
What is a Health Spending Account?
A Health Spending Account is a non-cash value benefit that can be applied to eligible medical expenses. Think of each employee having a bank account (with a limit per year) where they can spend their medical dollars. This is an attractive option for small business owners as they can pay the medical expenses of employees & their families on a tax-free basis to the employee. It is also tax advantages to small business owners as they can deduct all eligible medical expenses from their gross business income.
How does a Health Spending Account work?
A Health Spending Account is set up through a 3rd party administrator that specializes in these plans. The business owner sets an amount per employee (can be different amounts for different employees). Then when the employee incurs medical expenses that are covered by the HSA plan, they are compensated for this, and their overall remaining HSA balance is reduced by the cost of each claim. With most companies this is done in real time via an APP or website, so the employee no longer has to pay out of pocket and then waits to be reimbursed later.
What are the Benefits of a Health Spending Account?
Many employees like the flexibility of HSA’s. For instance, an employee with $3000/year HSA limit can decide where they want the money to be spent… dental bills and the remaining balance all on massage therapy or for another employee it could be spent on reoccurring prescription drugs and eyeglasses.
Features of a Health Spending Account for Employees
- No co-insurance. Whereas traditional workplace health benefits will have a percentage covered under the plan that they will pay per claim (for example, each time you go to the dentist, 80% is covered) HSA’s are paid up to the annual funding limit
- No deductibles. Traditional workplace health benefits will usually have a deductible for the first claim of the year per coverage section. For example, your first dentist visit of the year, $50 is not covered by the plan. With HSA, there is no deductible, so again the amount coverage is paid up to the annual funding limit.
- No limit on a particular type of service. Under traditional workplace health benefits there will be a limit for certain types of services such as vision coverage and especially paramedical services such as massage therapy, chiropractor, speech therapy, dietician, etc. In many cases these are $300-$500 per specialty per year. With an HSA, you have the flexibility to spend the money where you want. So, if you value chiropractic services and want to spend the majority (or the entire) annual limit (say $3000) at a chiropractor, you can.
- As claims are submitted through a 3rd party company, your employer doesn’t know what claims you are submitting for. In models where employers set up their own in-house medical reimbursement program, receipts for all types of medical expenses go directly to the employer for reimbursement to the employee. This may cause some anxiety on each side of the pendulum in these situations.
- Tax free compensation from their employer
- Did I mention flexibility?
Features of a Health Spending Account for Employer
- Cost certainty. Since the fund limit is set per employee per year and the administration fee is set by the 3rd party company, employers know up front how much their benefits will cost.
- Flexibility for staff. Under traditional workplace plans certain staff will value more coverage for different types of medical expenses. For example, Employee A may want high limits on dental but no vision coverage and Employee B not dental as covered under their spouse’s plan but wants more coverage for vision… under HSA, each employee can choose how and where to spend their plan dollars.
- Size of business. Traditional workplace benefits will often need a minimum number of employees to qualify for a plan; HSA plans can be designed for businesses with just one employee.
- Unused funds. If an employee does not spend their total funds allocated to them, HSA plans have options where the unused funds can be rolled into the next year for the employee giving them more funds or these unused funds can be returned to the employer.
- Tax advantage- as they can deduct all eligible medical expenses from their gross business income thus reducing their tax liabilities.
What are the Downsides of a Health Spending Account?
Although an HSA obviously has several benefits for both employers and employees, it does have a couple major drawbacks compared to a traditional workplace health benefits plan. The biggest drawback is that an HSA is designed to deal with simple, routine types of medical expenses such as dentistry, prescription drugs, paramedical services such as massage therapy, chiropractic services, etc. It is not designed to deal with catastrophic medical issues that can cripple an individual or family.
For example, traditional workplace benefits often have unlimited or high limits of prescription drug coverage, I have seen this firsthand with clients when someone in the plan is critically sick and needs thousands of dollars per month in drug coverage. In this situation, an HSA would prove to be quite inadequate as the HSA spending limit (say $3000 per year) would be exhausted in no time and the employee would have to pay for all the remaining prescription coverage out of their pocket. Whereas with a traditional workplace health benefit plan the prescription drug coverage would be covered for much higher limits and in addition there may be other coverage that the employee can access in the plan such as private or semi-private hospital room (if hospitalized), critical illness coverage, other medical services or equipment not covered by OHIP and even home services such as a private nurse.
Another drawback with an HSA is the coverage limit available is for the entire family (say $3000/year). The limits on each coverage under a traditional workplace health plan are per family member. For example, a family of four that has dental coverage limit at $1500 has $6000 available in just dental coverage.
Solution? Health Spending Account or Tradition Workplace Health Benefits?
In summary, the reoccurring theme is that HSA is more flexible and cheaper than traditional workplace health benefits plan, but a traditional workplace health benefits plan offers far more coverage and particularly much higher limit of funds are available.
In my opinion there is a place for both. This entirely depends on the several factors including: the size of the business, the industry the business is in, the demographics of the employees and most importantly the preference of the employees and employer alike. If the business is very small with a younger employee demographic, these groups tend to lean to the HSA. If the business is medium sized (10-50 employees) with a wide range of demographics, then these groups tend to lean towards the traditional workplace health benefit plan.
In either case, a great solution to cater to all employees is to mix the two plans! A traditional health benefit plan has a feature where employers can add an HSA to certain employees to “top up” or “fill in the gaps” for certain coverage. And in a straight-up HSA plan there are options to add more coverage such as life insurance, critical illness coverage, travel insurance, etc.
Whatever plan employers decide on in the end, it is important to contact an advisor for their expertise. With Zehr, we can send a survey out to employers or employees (or both) to see exactly the type of coverage and plan that is suitable for that specific business. Contact me and I can help you along your journey to provide value added compensation to your employees that will help with employee recruitment, employee retention & overall employee satisfaction!
Dave Stewart 1-800-667-1802 ext 240
Call Zehr Insurance brokers and see if we can help you with your insurance needs.