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Tax-free Savings Accounts (TFSA) were not the only thing announced during the federal budget this week. New allowances were made to the list of eligible claims in addition to some strong actions to be taken to tighten up the words and rules on prescriptions and vitamins. Go Flaherty, get tough with those supplement-poppin baby-boomers!
The budget approved the following items to be included as eligible expenses: altered auditory feedback devices for the treatment of a speech disorder; electrotherapy devices for the treatment of a medical condition or a severe mobility impairment; standing devices for standing therapy in the treatment of a severe mobility impairment; and pressure pulse therapy devices for the treatment of a balance disorder. Expenses for service animals specially trained to assist an individual who is severely affected by autism or epilepsy to cope with the individual’s impairment, was also added. Currently, the rules only recognize an individual who is blind, deaf or has a severe impairment that markedly restricts the use of the individual’s arms or legs.
Finally, the budget announced that it would revise the wording on prescription drugs. Currently, drugs, medications and other preparations are eligible for the Medical Tax Credit when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. To clarify the issue, the government is going to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.
This is good news! By reinforcing the rules, the government is taking a serious stance on the importance of the Medical Tax Credit as well as Health Spending Accounts. This should be a taken as stern message to some of the fly-by-night HSA providers to shape up your adjudication and HSA knowledge, or ship out!
Ah, Budget Day! One of the few days in the year when the finance minister gets a new pair of shoes, accountants in Ottawa suddenly feel like movie stars, and the CBC has so much Class A news content to share that they nearly collapse from the pressure in the newsroom. Yesterday, the federal government announced a new tax-savings vehicle for Canadians designed to help people save money on taxes. But what are the true savings versus an HSA?
Tax-Free Savings Account. This flexible, registered, general-purpose account is designed to allow Canadians to save money, tax-free. Starting in 2009, Canadians can contribute up to $5,000 every year to a registered Tax-Free Savings Account, plus carry forward any unused room to future years. The investment income, including capital gains, earned in the plan will be exempt from any tax, even when withdrawn. Canadians can withdraw from the account at any time without restriction. There are no restrictions on what they can save for; and the full amount of withdrawals may be re-contributed to their Tax-Free Savings Account in the future, to ensure no loss in a person’s total savings room.
It is important to note here that the $5,000 is not a deduction. It is an allowance. This means that you will not have to pay any tax on the interest this $5,000 earns. So what are the savings? Well, let’s say you are an incorporated professional in the $100,000 income tax bracket and you deposit $5,000 into a TFSA. You then use these funds to invest and your rate of return is 4%. Well, you would be looking at a total annual tax savings of $27.00 versus a traditional taxable account.
Health Spending Account. Now let’s take the same $5,000 and have your incorporated entity deposit the funds into an HSA in the form of a Health and Welfare Trust. The $5,000 becomes a business deduction for the company and is a non-taxable benefit for you, the employee. In essence, you are receiving $5,000 tax-free to pay for your current after-tax healthcare expenses. If these expenses are already $5,000 per year, you just saved yourself roughly $2,029.00 in taxes in comparison to the current medical tax credit less related fees for administering the HSA.
Both a Health and Welfare Trust and the new Tax-Free Savings Account can be used as a savings vehicle for future spending. While the HWT does not earn interest, the initial tax savings far exceeds any reasonable return one could hope for from an investment using a TFSA. But a TFSA does sound like a great tool for short-term savings. The question is, which is a better strategy. Opening a TFSA on January 1st, 2009 and depositing $5,000 or opening an HWT for the same amount and taking the $2,029.00 in tax savings to fund a TFSA the following year? Sounds complex, but a better model for making your money work for you in my opinion.
It is the last week for Canadians to make contributions into their RRSP to take advantage of the tax-deduction for 2007. I myself have received numerous calls from my financial advisor reminding me to top-up my contributions for 2007 and letters indicating that my advisors will be available until the wee hours of the night to help me should I decide to add more to my investment plan. It makes me wonder, how many Canadian small business owners would put more into the RRSP each year if they could free up the extra money? Are they spent?
Financial advisors tend to focus on the after-tax money available to invest as opposed to looking at ways to free-up pre-tax dollars as a tool for investing. For many small business owners, the HSA is an unknown option. Each year, they take a few of their after-tax receipts and make a claim for the medical tax credit. A nice gesture from the federal government to reimburse for medical expenses but certainly not enough to give someone more money to invest. The reality is that if they had a Health Spending Account, they could be using the tax-savings to re-invest into their retirement plan.
Each year, some financial advisors look for ways their small business clients can contribute more without giving them any real options to free-up the funds to do it. To all my readers out there who are financial advisors with small business clients…get them an HSA today! Show them how they can make their current after-tax expenses into pre-tax business deductions. Show them how this will impact their taxable earnings and how they can use the savings to re-invest in their RRSP! Given the economic conditions and the tough time your clients have had this year, this is a great way to show them how resourceful you are in finding ways to build wealth for them using a readily available and sensible solution – the HSA.
Well, the Oscars came and went last evening and Michael Moore’s documentary on the American healthcare system failed to win an Oscar. The documentary, “Sicko”, takes a look at American health care and explores the reasons behind the adoption of a for-profit system by profiling individuals whose lack of proper care and battles with insurance companies have drastically affected their lives. The very issues outlined in this film are what the democratic leadership hopefuls are driving home each day as they try to win votes to pick a leader and presidential candidate.
If you have not seen “Sicko”, I strongly urge you to do so. While many say that the film is biased (Its Michael Moore people, get used to it), it does provide an excellent overview of the American system in comparison to universal systems in Canada, the UK, France, and Cuba. As a Canadian, one of the first things you will notice about the film is how basic our universal care is next to other countries. If you want to be surprised when you watch the film, don’t read any further…
England’s National Health Services or NHS, as an example, has an innovative flat-fee for drugs. As of April 2007 the prescription charge for medicines in England became a flat fee of £6.85, roughly $13.45 CDN. People over sixty, children under sixteen (or under nineteen if in full time education), patients with certain medical conditions, and those with low incomes, are exempt from paying. The charge is the same regardless of the actual cost of the medicine but higher charges apply to medical appliances. In France, the system pays for and manages in-home doctor visits, hospital care, prescription drugs, salary continuance for parents and recovering patients, as well as in-home domestic support services to ease the burden of families who have had a recently born child. That’s right, they send you a government issued nanny and pay for it!
While I would be opposed to some of the perks in the French system (we pay enough in taxes already), I must say that the UK’s NHS solution does have some perks, particularly the fixed drug costs. Gossip in Ottawa is leading many to believe that a national pharmacare system is inevitable. Until then, we are still miles ahead of the US system. According to the Institute of Medicine of the National Academy of Sciences, the United States is the only wealthy, industrialized nation that does not provide universal health care. Apparently not an issue as the Oscar went to “Taxi to the Dark Side”, a film about an Afghan taxi driver beaten to death in 2002 while in U.S. military custody and the abuses committed during the detainment and interrogation of political prisoners. An important issue as well, and I will probably watch this on the weekend. But still, I still think “Sicko” could have done more for America.
Is it any surprise that Google would come up with a solution to medical record keeping before every government-funded agency? I mean, what an embarrassment to the private sector insurers and the publicly funded health agencies! In Canada alone, several initiatives are underway (as I write this) focused on a secure and reliable application where doctors can keep on-line profiles of patients including medical history, drug allergies, and issued prescriptions. The card providers are even trying to develop a solution. Then, out of the blue, from nowhere, an Internet search company beats everyone to it.
I guess we should not be surprised. For years now government agencies and health providers have been stumbling over this concept. It wasn’t the concept – everybody agrees that it would be a useful tool. Rather, it was the people involved. With so many varying interests, bureaucratic levels for approval, and decision makers, it is no wonder why it has taken them so long to come up with a solution. Like everything else, it took an outsider to jump in and say “Hey guys, shut up for a minute and listen…here is how you do it.”.
I think that the announcement today by Google is a wake-up call to our industry as a whole, whether they be practitioners, healthcare associations, government agencies, or insurers. The old-ways of doing things are quickly being replaced by new and more efficient manners of operating. The wake-up call is that we need to start thinking like an outsider looking into our industry and stop making policies and strategies based on how it has always been done or how the industry perceives the current benchmark of the industry. Otherwise, we will start to see more and more “industry outsiders” one-upping the leaders in our field.
I can already here the comments from the leaders of our industry…”This is terrible, what about privacy? This cannot be allowed!”. And I do agree to some point. The third-party services being offered by Google are an issue because they are not covered by the Health Insurance Portability and Accountability Act (HIPPA) in the US. Passed in 1996, HIPPA established strict standards that classify medical information as a privileged communication between a doctor and patient. So sure, there are rules in place to protect this information and Google is not bound by them. Just get over this issue for a moment and ask yourself – Is it better to reject Google’s accomplishement because of privacy issues or celebrate the fact a technical solution we have all been waiting for is here and ready to be used? We could not do it, and Google did. I think as an industry, we need to embrace it and find a way to take the breakthrough technology and apply it in a manner that is sensible and not try to re-invent the wheel. If we keep doing this, we will continue to get further and further behind other industries and be subject to more embarrassments like today’s announcement.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Mandatory Insurance
There are many Health Spending Account (HSA) providers in the Canadian market these days. I will not get into a name game over various providers but I did want to stress one major issue I have over how they package HSAs and their availability. Specifically, the issue related to mandatory insurance.
Don’t get me wrong, insurance is ALWAYS a good idea if you are using an HSA for your core benefits plan. The issue that is counter-productive is the requirement of many HSA providers when it comes to insurance. First off, an HSA is supposed to be a financing vehicle for your healthcare spending, not just a nice to have addition to insurance. Many providers will not allow you to have an HSA unless you purchase their core health insurance product. Why would they do this you ask? It is a cash grab. Most HSA providers use the HSA as a “nice to have” bonus to an individual health insurance product or combine the HSA into the overall plan itself. The issue here is that as an HSA owner, you have the right to choose the insurance product you want to buy and it should never be a conditional requirement to access the benefits of an HSA.
I, for example, have had a Manulife “Cover Me” insurance product for many years. It is my emergency back-up insurance should I ever need it. I have never made any significant claims and pay the low premiums purely for protection only. I also have a Benecaid HSA as an employee of the company. At the time, I could have opted to purchase Benecaid’s Premiere Plan product (in my opinion superior to Manulife), however I decided to stay with Manulife as I had been with them for many years and my medical history for pre-existing conditions would have remained intact by staying. Over the past few years, I have been able to claim my premiums to Manulife as an eligible expense from my HSA. The key thing to note here is that I used my HSA from one provider to pay an insurance premium for a product I chose to purchase from another provider. Choice is the key.
When an HSA provider requires you to purchase their insurance product with an HSA, it takes away the freedom of choice the HSA is supposed to provide as a core benefit. The HSA is your money and you should have the right to choose how it is spent. If you want basic insurance coverage, you should be able to select any provider you desire. The HSA allows you to tailor your overall health plan to suit your needs. When an HSA provider asks you to choose a specific insurance plan they represent, they are not acting in the best interest of the client.
If you currently have an HSA or are considering one, be sure to ask your HSA provider about any requirements related to a sponsored insurance product. If they only permit you to buy the product they recommend….buyer beware!!
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
One of the biggest issues facing employers, both small and large, is the never ending increase year over year in the cost of their health benefits plan. Whether they are a global corporation or a sole-proprietor, the increases in annual premiums for health insurance is making a huge dent in the value vs. cost equation. Annual premiums are calculated at renewal each year by the claims incurred in the previous year. Since claims and overall costs continue to rise, pretty much every policyholder can expect an increase in premiums every 1-2 years. Luckily, the model for an HSA is very different.
When you establish a Health Spending Account, you make an assessment of your needs for healthcare costs in a given year. You may decide that you will spend a certain amount on predictable items like dental cleanings and massage therapy. You may also decide, and it is strongly recommended, to buy a basic insurance solution to cover the unpredictable events, like illness and drugs. The total amount needed to cover these costs is what you would then deposit into your HSA. The key here is limiting the claims you make against insurance and increasing the claims you make through your HSA. This model allows you to make claims without every dollar contributing to premium increases. As a result, you obtain a better level of budget certainty year over year as you have greater control of your spending and where it is being spent. Since you are using real dollars for 75% of the costs, assuming 25% of your HSA is reserved for drug-only insurance premiums, you have greater control on spending and can increase the contribution to your HSA or cost as you see fit.
When you think about the money you spend on your health insurance plan, most people would say that they have 0% control over the costs. With an HSA for the predictable claims and a basic drug plan for the unpredictable, you can at least gain control over 75-80% of you plan. I am sure you would agree that any degree of control and budget certainty is better than none!
The Super Tuesday Primaries and the 2008 race for the White House has received such international attention, I thought it would be fun to see which of the candidates would be best suited to live or even visit The Great White North. I looked at each of their health care policies and tried to match their strategies to those in Canada, some were easier than others…
Hillary Clinton (Democrat) – A Canadian Living Outside of Quebec, probably in Saskatchewan!
Hillary would mandate individual health insurance coverage for all Americans. Offers federal subsidies for those who cannot afford it. Allows individuals to choose from among several private plans also offered to members of Congress, as well as a new public insurance plan modeled after Medicare. Expands Medicaid and federal children’s health care programs.
Barack Obama (Democrat) – A Canadian most likely to live in “La Belle Province”..does he speak French?
Would create a national health insurance program for individuals who do not have employer-provided health care and who do not qualify for other existing federal programs. Allows individuals to choose between the new public insurance program or from among private insurance plans that meet certain coverage standards. Requires employers who do not provide health coverage for employees to pay into the national health insurance program.
Mike Huckabee (Republican) – Could visit Canada but would probably be driven out of Saskatchewan by mobs!
Says current system is “irrevocably broken” but opposes federally mandated universal coverage. Would encourage private sector innovation to reduce health care costs. Supports market-based approaches at the state level. Would make health care more affordable by reforming medical liability, improving electronic record-keeping, promoting portable health plans, expanding health savings accounts, making health insurance tax deductible, and offering tax credits to low income families.
John McCain (Republican) – Couldn’t even get passed Customs!
Opposes federally mandated universal coverage. Would increase awareness and promote the use of existing children’s health insurance programs while expanding community health centers. Supports health care tax dividends for low-income Americans, medical malpractice reform, improving electronic record-keeping, expanding health savings accounts, and encouraging small businesses to band together to negotiate lower rates with health care providers.
If you want to see more coverage on the candidates, CNN offers an excellent election coverage page you should check out.
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
If you apply for insurance, one of the first things they ask you for is the list of dependents. Most people have had traditional insurance at some point in their life and so we all know that a dependent is basically your spouse, and children under 18-21 years of age. You can have a child as a dependent over age 21 with many plans however, they need to be enrolled in school full-time. Well, when it comes to Health Spending Accounts, you can kiss this goodbye!
Health Spending Accounts use a different model for determining dependents thanks to the wonderful people at Canada Revenue Agency (CRA). Because the rules for HSA delivery are tied to the guidelines related to taxes and financial dependents, an HSA allows you to cover a wider range of family members, not just the spouse and kids. In the CRA’s interpretation bulletin IT-339R2 Meaning of Private Health Services Plan, it clearly states that the funds may be used by the employee, the employee’s spouse, and any member of the employee’s household with whom the employee is connected by blood relationship, marriage or adoption. This means that in theory, an HSA should be able to cover a grandparent, an uncle, a sister, a nephew or anyone else in your family. Of course, to be a friend of CRA, it is recommended that if you choose to add one of these dependents, they should be financially dependent on you for support in the year.
The key point here is that you are not limited to your immediate family for coverage with an HSA. If you have an elderly parent who relies on you for financial support and care…use an HSA! If you have a brother or sister who struggles to care for their autistic son and rely on you for help…use an HSA! Got a university drop-out son or daughter at home who just won’t leave the nest…use an HSA!
There is no limit to how and who you can coverage with your HSA as long as you remain smart about the guidelines set by CRA. If they rely on you for financial support, then they can be your dependent.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Classes Are Key
I received a call the other day from an advisor with questions regarding Health Spending Accounts. He had a client with a Health Spending Account at another provider and wanted to switch it over to Benecaid. I said sure and asked him how many classes were in the group. I heard silence at the other end of the phone.
It turns out that the client had set up the Health Spending Account for themselves and not for the other employees in the company. In theory, this is OK. The problem was that he did nothing to distinguish himself from the other employees in order to receive this benefit nor did he establish a fixed amount or maximum. This can cause issues for the Canada Revenue Agency, specifically when you need to explain that this is not a shareholder benefit. The key to clarity is classes.
The interpretation bulletins are for interpretation. This means that as an HSA owner, you should make every effort to show your interest in following the rules and using the gift CRA has given Canadians in a sensible way. Establishing classes in your company based on work roles and performance is a great first step to show that you are acting in good-faith. You do not need to offer an HSA to all employees, but you should always provide the benefit to members of the same class. Each class should have defined contribution amounts or limits reasonable to the work and compensation of the employees within the class. If you have a team of executives, of which one member is the owner, you should offer an HSA to the entire team. If you only have one owner in the team of executives, you should make a distinction as to why they are entitled to the HSA versus other employees. Establishing benefit classes, one for executives and another for administrative employees is a great start.
If you currently have an HSA or are considering one, be sure to ask your HSA provider about the establishment of classes If they don’t know what benefit classes are….buyer beware!!
HSA Information for Canadians 
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