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To continue with my dental experience, I decided to ask for a series of estimates for braces – the invisible kind not the kind Tutti wore back in the eighties. Many of you are asking yourself…why on earth would you want braces? Especially at your age? Well, I have always had a bit of an overbite and when my wisdom teeth came in, they caused my teeth to be extra tight. So, I am exploring the option of getting braces…..until I received the quote. The cheapest solution will probably be $6,000 for what I am looking for – the equivalent of two 42″ Plasma Screen TVs or new hardwood floors in the house!
I don’t need them right away and can start saving today. Since Gremolata is incorporated, I qualify for a Health and Welfare Trust. I don’t want to go overboard here deposit-wise, but I could easily allocated $300 a month towards an HWT in my name. This could be considered the core health benefit plan for the company. This would provide me with $3,600 a year in deposits less a 10% administration fee ($360). Using this schedule, I would have enough saved up for the braces in two years. The dentist suggested I wait 6 months before I even consider the consultations with the specialist, so this time line works well for me.
Let’s do some tax talking for a minute. The $3,600/year would become a business expense for the corporation as a cost of doing business – keeping me healthy. The $3,600 deposited into my Health and Welfare Trust, as an employee of the corporation, would be a tax-free benefit for me (as long as I continue to reside outside of Quebec). In essence, I am now receiving $3,600 in additional compensation I can use for braces without having to pay the income taxes on the amount.
So, there you have it. I can use my Health and Welfare Trust to pay for my braces and save both myself and the company money. I can be flexible with a deposit schedule I am comfortable with financially and use the funds when I have reached my goal. You now understand how to save money as well as my dental records. Ah, the internet.
OK. I have to make an announcement. One that I am sure will shock many of you out there who know me personally and read my blog. It is a little embarrassing, however, I went to the dentist today….for the first time in twelve years!!
I know – somewhat gross, but I brush and floss daily and had perfect teeth as a child. Not a big issue in my books. I was one of those kids everyone hated, where I never needed braces and everything just grew in perfectly – even my wisdom teeth. I probably should ask my father for some money in lieu of costs associated with braces, considering how much my perfect dental history saved him. However, I have been scared of dentists and the idea of having someones fingers poking my teeth, so I resisted until I got an accidental chip on my front tooth.
The first thing that I encountered when booking my appointment was the famous line – “do you have insurance?”. I said yes and booked my appointment. Since it had been a while, I had to get the full exam with those creepy x-rays and the counting of the teeth. The dentist was a wonderful woman and I would highly recommend her to anyone in and around Oakville, Ontario (e-mail me if you want the details). Given the painless experience, I was ready to get all kinds of treatments like whitening and a guard to stop me from grinding at night – I deal with allot of stress these days managing the upcoming re-launch of Gremolata. The dentist said, these are all great things, but they will not be covered by insurance. That is when I said “no problem, I have a health and welfare trust”. She looked at me funny and that is when sales man James took over.
I explained to her about the Health and Welfare Trust I have with Benecaid and that I had a reserve of funds I could use for exactly this type of expenditure. She noted that these costs can be substantial but I told her that I had more than enough to cover it. She was impressed. After all, how many clients walk into a dental office and say, give me the works! Well, those with an HWT would.
I think this is why I am so passionate about Health and Welfare Trusts. I don’t feel limited to a plan. I can get the basic care I need but also invest in the things that will make me feel better about myself – such as brilliant white teeth or a new nose (the later requires more thought). All joking aside, it is a great feeling to know that you have the tax-free money to spend when and how you want to. It also makes me think how impressed every employee would be with the company they work for if they had access to the same HWT as I did.
Oh, and for the record. No cavities and a healthy smile was the diagnosis I received! Whew!
Recent studies by Statistics Canada indicate that more than 1.7 million Canadians ages 45 to 64 provide care to approximately 2.3 million seniors with long-term disabilities or physical limitations. Seven out of 10 of these caregivers are employed full-time. With baby-boomers being forced to balance the needs of their elderly parents and their careers, the outflow of skilled workers into early retirement to focus on their families may speed up the looming labour crunch. While most HR professionals are focused on the approaching mass retirement of baby-boomers across Canada, eldercare responsibilities are proving to be a burden for the employee and an opportunity for the employer.
An opportunity for employers? Did he say that correctly? Yes, in fact. Providing care services for a parent can be an immense financial burden for employees. While some can pay for basic care services, many opt to manage the care themselves due to the overwhelming costs. The opportunity for the employer is that the introduction of a Health and Welfare Trust to the benefits program could help to relieve this burden for the employee. The result is a reduction in stress amongst employees with elderly parents and a desire to stay with their current employer long-term, perhaps well into their expected retirement years.
The Health and Welfare Trust provides the employee with pre-tax dollars to use towards health care costs. Since Canada Revenue Agency (CRA) allows a dependent to be an elderly parent, as long as they are financially reliant on the employee, the costs associated with their care is considered an eligible expense. This means that the HWT can actually serve as a formal financing vehicle for the employee’s elder care needs. As an employer, you can choose to provide the HWT as a top-up to the existing benefit plan, as an alternative matching for a DC pension plan, or even through a salary amendment agreement with the employees. The key benefit for the employee is that the original costs paid with after-tax dollars can now be paid using pre-tax dollars. In some cases this amount can be a substantial financial benefit for the employee.
As an employer you stand to benefit, as your baby-boomer employees opt to stay longer knowing they have access to a financial vehicle to care for their parents. You also have the opportunity to establish yourselves as an employer of choice within your industry by offering an innovative employee-focused benefits solution.
I am often asked about the conflict of interest with Health and Welfare Trusts and their portability – especially when it comes to employee retention. Many people will argue that the notional credit HSA model, where the employer can take back the funds if the employee quits, does a better job of retaining talent. To this I often respond with…”just like how salary keeps them, right?”
You see, very few people leave companies for money, they leave it for people, policies, or practices they feel they can better relate to. Money may be a driving factor, but the reality is that employees tend to leave companies because they no longer have a bond to the people, leadership, or culture of the company they are with. So the use of an HSA as an employee retention tool, where it is a benefit as long as they are employed by the company, can actually be a negative versus a positive.
This is why I love the Health and Welfare Trust as a form of HSA. When an employer offers it to their employee, they are saying “Here is a benefit I think you could use and I hope it helps you today, and in the future”. There are no conditions to the gift you are providing them as an employer. When you offer something as a condition of employment, your gesture may send the wrong message to the employee.
If you still want this to be a retention tool, why not focus on the deposit schedule versus limiting access. You can fund the employee’s HSA using a monthly schedule and let them know that you will continue to fund the account until they cease to be an employee. For many employees, the value of the funds will become apparent the first time they send in a claim. When they realize how much they can save each month and what they can save for healthcare-wise in the future, the incentive to stay is pretty much established.
The bigger perk is that the gesture, seeing how it does not come with any conditions, is a more employee focused benefit and makes you look like a HR hero versus a cheap old bugger!
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.
Well, who would have thought that my posts regarding Consumer Driven Healthcare would spark so many calls and e-mails. Since a blog is an ongoing story that is forever being written, I don’t always get the chance to write every detail. Over time, this will change as I add more and more content – I can only type so much in a day.
One of the e-mails I received asked if I believed that Consumer-driven healthcare could work without insurance. The answer of course is no. If you had the chance to read my article in Benefits Canada this month, I provided some options for Canadian companies to use the US-model of delivering CDH with the use of a Health and Welfare Trust (HWT). In the article, I suggested that companies offer an Health Spending Account in the form of an HWT as a replacement to traditional insurance for predictable claims. An HSA is an ideal funding model to cover predictable claims, the ones you know your employees will incur and therefore you have no need to insure for the event. After all, nobody would ever consider buying gas insurance for their car so why would you pay a premium for your annual dental cleaning.
However, I cannot stress enough the importance of insurance for the unpredictable. That is, after all, why we buy insurance. If anyone thought that I suggested we abandon insurance and go to a cash-savings model only, I apologize. What I wanted to stress is that the decision making on how premiums are paid and what they are paid for should be part of the decision making process of the consumer. Maybe not immediately, but certainly down the road once the support network is in place to educate and inform consumers to make sensible choices. The key issue at hand is the ability for consumers to make choices and spend their money in a more sensible manner. Buying insurance for the unpredictable claims and using their HSA for the predictable is money spent, in a sensible manner.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Fund Management
When you open an account with an HSA provider, you need to be certain that the funds are being deposited into a secure and reliable account. The last thing you need is an HSA provider poorly managing your money. As I have said before, beware of those companies looking to make a quick buck with little respect for the interpretation bulletins issued by Canada Revenue Agency.
Health and Welfare Trust (HWT)
A Health and Welfare Trust must always be set-up in a custodial trust account in the name of the owner. Some HSA providers operate their own trusts while others use a third-party (like CIBC Mellon, TD, etc..). These trusts must be managed by third-party trustees and the funds may only be released from these accounts with the approval of the trustee for eligible medical expenses. When evaluating an HSA provider, feel free to ask them where the trust is established. If they operate their own trust or use a third-party, do some investigating on the account and their practices. This can be done through the Office of the Superintendent of Financial Institutions (OSFI). If the trust company is legitimate, they will be regulated by OSFI and their Web site offers great resources to determine the stability of the trust company being used.
Private Health Services Plans (PHSP)
PHSPs are most often managed using dedicated bank accounts. A good PHSP provider should have a dedicated bank account established with a Tier 1 institution exclusively for the funds held for a client’s PHSP. They should never be deposited into a firm’s operating account. A few years back, I heard of a major HSA provider in Canada depositing PHSP funds into their operating account (i.e. the same account used to pay their own business expenses). I was shocked to hear this! Always ask your provider where the funds reside!
General Policies/Procedures
Whether you have a Health and Welfare Trust or a Private Health Services Plan, your provider should always have a statement of financial responsibility available for you on demand. This statement should be signed by the firm’s Director of Finance or CFO and provide information on where the funds are held, how the accounts are structured, and the processes and procedures they use to ensure your deposits are managed in a responsible manner. The statement may also provide the name of their auditor and their general accounting procedures.
In summary, remember to consider fund management as an important evaluation tool in choosing an HSA provider. If they are reluctant to disclose the procedures and suppliers….buyer beware!!
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
Administration Fees
Every HSA provider charges an administration fee for managing your health spending account. But what is reasonable and what should you look for in choosing the right HSA provider? To make a sensible decision, you should look at the different fees being charged and the pros and cons of each.
Administration Fee
Most HSA providers charge an administration fee. These fees tend to be in the range of 10% and 13% of deposits or claims. If you pay more than 13%, you should look elsewhere as there are many lower-cost alternatives. The fee is generally used to adjudicate your claims and manage the funds. Some HSA suppliers charge the admin fee on deposits while other charge it on claims reimbursed. Both models have their advantages. The first one takes the admin fee off on deposit, so you do not have to worry about it later when you make claims. The later charges you the admin fee each time you make a claim. They both end up costing the same, so not something to worry about – it is simply a personal preference.
Account Set-up Fee
Some HSA providers charge an account set-up fee. These fees can be as high as $300.00 simply to gain access to an account. These providers also charge an administration fee on deposits or claims. In my opinion, there is no need for a company to charge you an account set-up fee if they are charging you an administration fee – it is simply a cash grab. If you are opening an HSA for the first time, and you are unsure if it will be beneficial, I would strongly recommend using a provider that does not charge an account set-up fee. You are wasting your money!
Cheque Processing Fees
These fees are usually issued when a reimbursement cheque is issued (these fees average between $3.00-$4.00 with most HSA providers). The fee is applied to the batch of fees and not each claim. These fees cover postage requirements, cheque processing, and related charges to the trust account or bank account – depending on if you have a Health and Welfare Trust (HWT) or a Private Health Services Plan (PHSP) respectively. If a provider charges a cheque processing fee, the first thing you should look at is their admin fee. If they are charging 12% or more in admin fee, then they should not be charging you a cheque processing fee. You should never be asked to pay more than $4.00 for a cheque processing fee – the math simply does not justify it.
In summary, when choosing an HSA provider, you need to consider the fees and what works best for you. Try to avoid account set-up fees whenever possible. If you pay an admin fee, ensure that the cheque processing fee is reasonable. the lower the admin fee, the more acceptable the cheque processing fee. If the admin fee is high (over 12%) and they charge a cheque processing fee as well, look elsewhere.
In recent years, I have seen a growing number of Health Spending Account solutions appear in the market. Some are great and I applaud those providers who have done their research and developed a product that is respectful of the interpretation bulletins published by Canada Revenue Agency (CRA). However, a growing number of companies have entered the market in recent years looking to make a quick buck without truly investing in their knowledge of the product. To help, I thought I would start a new blog series…. items you should look for when choosing an HSA provider…
Unused Funds Being Returned to Company
Canada Revenue Agency is pretty clear on this issue – funds can NEVER revert back to the employer. The only time this can happen is when an HSA is used in a notional credit program combined with a flexible benefits plan. If you are working with a supplier and they allow you to take back unused funds from an employee if they quit, then you should re-evaluate your choice of supplier. Many of the new suppliers have taken the rules outlined in CRA bulletin IT-529 Flexible Employee Benefit Programs, and confused them with the guidelines outlined in IT-339R2 Meaning of Private Health Services Plan.
The guidelines outlined in the later bulletin, and to an extent those outlined in the original IT-85R2 Health and Welfare Trusts for Employees, are truly the best bulletins to follow regarding PHSPs and HWTs. The information in IT-529 is related to flexible benefit programs and provides an overview of how to account for benefits using a notional credit program. A notional credit program supports flexible benefits or cafeteria plans – common in many large corporations. Running a flexible benefits program using notional credits uses an HSA (in the form of a PHSP) in addition to a core plan offering varying levels of coverage for the employees to choose – traditionally as part of an annual election process.
In summary, funds can ONLY revert back to the employer if the program is part of a notional credit arrangement supporting a flexible benefits program. They belong to the employee! If you have a Private Health Services Plan or Health and Welfare Trust where the supplier allows you to take back the money if an employee is terminated or leaves…..buyer beware!
I am often asked “why would anyone want to incorporate their business?”. I can understand the headache of more paperwork and reporting (I am living it right now), but what I cannot understand is why a business owner with an employee base would let incorporation stop them from truly benefiting from a health spending account.
For sole-proprietors, the only HSA available is a private health services plan or PHSP. If they are a small business with no employees, then it makes sense to stay unincorporated – unless their annual maximums do not meet their needs in terms of annual medical expenses. It is when a sole-proprietor has employees that the benefits of incorporation are revealed.
If a sole-proprietor has employees and wants to offer a health spending account to them, the employees would be eligible for a health and welfare trust (no limits, unlimited roll-over) while the business owner would be eligible for a private health services plan (caps on contributions, 2 years forfeiture of funds from date of deposit). But the real headache comes from the contribution limits for sole-proprietors in a group setting.
You see, the rules for unincorporated groups states that the business owner can only deposit as much into their PHSP as the smallest amount offered to their employees in an HWT. Let’s clarify this with an example…
A sole-proprietor (let’s call him Bob) has three employees, two salespeople and a receptionist, representing two employee classes in terms of compensation and role in the company. The two salespeople are entitled to a health and welfare trust of $1,200 a year and the receptionist is entitled to $800 a year. Bob has a wife and two dependent children under 18 years of age. In theory, Bob should be able to claim up to $4,500 each year in PHSP deposits (2x$1500 + 2x$750). However, because the receptionist is entitled to only $800, a year, Bob is now limited to the same amount, as she represents the lowest amount being deposited amongst employees. This means that Bob is losing out of $3,700 in HSA contributions each year.
The solution? Incorporation of course! If Bob incorporated the business, he could still deposit $1,200 and $800 into the salesperson’s and receptionist’s health and welfare trusts respectively. However, Bob would also be able to deposit whatever amount he wanted into an HWT for himself, as long as it was reasonable to his needs and role/position in the company. Anything perceived as excessive would be considered a shareholder benefit. Either way, he could at least deposit the full $4,500 he would have been entitled to as a sole-proprietor and receive an additional $3,700 business deduction – more than enough to cover the $250 Industry Canada Fee to incorporate.
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