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The Alberta government officially said goodbye to the health tax in their recent budget effective January 2009, joining seven other provinces and territories (New Brunswick, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon) that don’t collect specific health premiums or taxes. These provinces fund healthcare out of general tax revenue.
So, what is an Albertan to do with their new found wealth? After all, each resident is looking at savings in the range of $528 per individual and $1,056 per family. It is a great amount to use on a new television or perhaps a BBQ for summer entertaining. But if they are self-employed, like so many other Albertans working in the oil and gas industry, they could be putting these funds into a Health Spending Account to maximize the return.
If you think about the money they are receiving back as part of their total budgetary spending, they could simply deposit the equivalent into a Private Health Services Plan. There are several HSA suppliers in Alberta who would be happy to take the money for them and in return, the taxpayer now has access to a reserve of funds to keep themselves and their family healthy. The big perk, they can double dip on the tax break they receive by making it yet another tax deduction for themselves as a PHSP. Brilliant!
I hope all self-employed Albertans will think about this as an option. It might be a small amount of money you are getting back, but it is still a great way to make it work for you long-term.
I was thinking about Health Spending Accounts, like I always do, and thought I would write a blog entry to clearly articulate the differences between HSAs and traditional insurance. I thought this would be a valuable tool for consumers considering an HSA over an insured plan. Here we go…
Insurance
Places limits on coverage to a defined maximum. Some plans allow you to have a higher limit for a higher premium.
Health Spending Account
There are no limits in terms of specific coverage. If you are incorporated and have a Health and Welfare Trust, the amount you can contribute is unlimited. If you are unincorporated, you are entitled to limits based on the number of dependents eligible from your Private Health Services Plan. Either way, you are not limited to a specific amount of coverage, you can allocate the funds to whatever healthcare costs you see fit.
Insurance
Requires a premium to be paid. This premium is equal to the true cost of claims plus 20-30% to allow for risk factored into the plan to ensure profitability for the insurer.
Health Spending Account
The premium is really a deposit structure equal to the true cost of claims plus 10% to cover administration of the plan. These costs are fixed.
Insurance
The cost of the premium is defined by the insurer and can be increased at their discretion based on claims from the previous year.
Health Spending Account
The cost of the plan is driven by the consumerand there are only increases if the HSA owner wishes to deposit more money into their account.
Insurance
The plan covers immediate dependents only such as spouse and children under age 18.
Health Spending Account
These plans cover any dependent related to the account holder by blood or marriage, regardless of age, as long as they are financially reliant on them in a given year.
Insurance
These plans may limit coverage to within Canadarequiring a supplemental travel policy for out of country health care expenses.
Health Spending Account
The funds in the account can be used to reimburse claims globally provided it is an eligible expense in their home province.
Insurance
The premium paid cannot be reimbursed and is lost at the end of the year. If no claims are made, the insurer keeps all of the premium.
Health Spending Account
The funds in the HSA roll-over to the next year and are not lost. Note: This applies to a Health and Welfare Trust. If you have a Private Health Services Plan the funds are lost after 2 years from date of deposit if not spent.
Insurance
The plans do not cover all procedures and drugs.
Health Spending Account
Funds in the account can be used to cover all drugs and treatments prescribed, dispensed, and performed by a medical practitioner including smoking cessation, fertility treatments, and elective surgery.
Insurance
These plans require basic medical underwriting and do not cover pre-exisitng conditions.
Health Spending Account
There is no medical required and the funds can be used to cover pre-existing conditions.
I have spent a few months looking at claims and how people submit them into Benecaid, where I currently work. Submitting manual claims can be a very frustrating experience for those not living inside the insurance world. Paperwork, mailing addresses, originals versus copies – it can be a real headache. That being said, I thought I would share some of the biggest mistakes people make when submitting claims to an insurance company.
1. Original Receipts & Prescriptions
This is by far the biggest issue for customers. You should always send the original receipt and if you have it, a copy of the prescription to validate that it was prescribed by a doctor. The second item isn’t always necessary but is handy to ensure faster processing. If you want a copy for your records, keep the photocopy AND NOT the original. The insurance provider or HSA adjudicator will question the copy and most likely return it to you. After all, if they received a copy, how many other companies did you send the copy to?
2. Use The Right Form
With so many forms, it is hard to stay on top of which one to use. Every insurer or HSA provider should have the forms readily available on-line. If you are unsure which form to use, your best bet is to call your insurer or HSA adjudicator once a year and ask. Download and print a couple and keep them on file.
3. Complete the form in FULL
Many insurers have standardized forms designed to be scanned to retrieve the data and convert it into an electronic format. This technology is used to speed up the processing and is designed to be a benefit for the customer. When you do not complete the form in full, or enter information in the wrong place, it can cause problems in scanning and slow-down the adjudication of your claim. Take your time and complete the form in full. Most insurers and HSA adjudicators have reference guides you can ask for if you need help…just ask them for a copy.
4. Send Your Claim to The Right Address
Be sure to send your original claim and the correct completed form to the right place. Many insurers and HSA providers have more than one location for adjudicating claims. If you are unsure of where to send your claim, call their customer care department before you send it. It can save you problems down the road.
5. Coordination of Benefits
If you are already covered under another plan (i.e. company plan or spouse’s plan), the insurer will most likely ask you to submit your claim to the first insurer before you submit it to them. They will cover anything not covered from the other plan up to your maximum. If you have an HSA, it is always wise to send the claim to your insurer first. When you receive the claim back, the difference can be taken out of your HSA. To do this, you simple forward the original Explanation of Benefit (EOB) received from the original insurer with a claim form. The HSA adjudicator will take the amount unpaid from your insurer and reimburse you the difference from your HSA. While it is a complex process, it does save you money in the long-run from your HSA. After all, if you already have insurance through another source and it is not costing you anything, you should take advantage of it!
These tips are not going to ensure that every claim is paid but it will help to make the process faster and ensure proper adjudication. If you follow these tips, you should see a significant reduction in follow-up with your insurer or HSA to find out…”Why won’t you pay my claim?”
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
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.
Some more help on finding the right HSA for you in my series on items you should look for when choosing an HSA provider…
PHSPs With No Limits
If you are a sole-proprietor, you can open a Private Health Services Plan through most third-party administrators and insurers to finance your healthcare costs as well as insurance premiums. Most sole-proprietors are individuals (i.e. tradespeople, lawyers, hairstylists, etc..) while some are employee groups (i.e. smaller retailers, professional firms, etc..) One problem that is causing grief is the growing number of HSA Providers offering PHSPs to sole-proprietors and NOT following the rules in terms of contribution limits.
If you are a sole-proprietor (unincorporated), you may qualify for a PHSP up to an annual maximum depending on the structure of your family ($1,500 / sole proprietor, $1,500 / dependent over 18 years old, $ 750 / dependent under 18 years old). Some HSA providers have ignored this rule, clearly defined in IT-339R2 (Meaning of Private Health Services Plan). This can be a problem for small business owners with a PHSP. One, you may be placing more claims through an administrator than you are allowed to claim on your return, costing you more money in administration fees to the HSA provider. Secondly, your deduction may be offside if you are offering a PHSP to your employees as an unincorporated entity. So, what should you do?
First, look at your existing deposit schedule versus claims and compare this amount to the logical maximum you would be entitled to with a PHSP. If you are above the maximum, you should speak with your HSA Provider regarding options for reducing the amount. If you have employees, it is important to note that their funds should be residing in a Health and Welfare Trust and not a PHSP. Secondly, you should remember that as owner – you may only deduct your PHSP contribution or the amount of the smallest contribution made to an employee, whatever is lower. Many HSA Providers forget this and the last thing you want is an auditor pointing this policy out to you.
In summary, PHSPs are great as long as you follow the rules. When choosing an HSA Provider, be sure to ask them about their policy on PHSP maximums and over-funding. If you have a group, ask them how they structure their plans to accomodate multi-employee HWT requirements. If they are confused by your questions….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…
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.
HSA Information for Canadians 
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