Since being introduced in Canada in the 1980s, flexible benefits programs have become increasingly popular as plan sponsors balance the desire to attract and retain employees with the need to provide a sustainable benefits program.
Even smaller employers have looked to vehicles such as Health Care Spending Accounts and Taxable Spending Accounts as a way to offer flexibility and choice.
Why introduce a flexible benefit plan?
A flexible benefits program can appeal to the diverse needs of an employee population by allowing for choice while providing the employer with an effective mechanism for controlling costs. Employee cost-sharing and the visibility of price tags tend to give an employee a better sense of the value of the benefits program, and can promote health care consumerism.
With flex plans, employers often look to offer a wider range of benefits such as cash back on unspent flex dollars, vacation buy and sell, Health Care Spending Accounts, Taxable Savings Account, RRSP contributions and more.
Manulife Financial underwrites a broad range of flexible benefits programs and has been providing flex administration services for a number of Canadian employers since 1995.
Health Care Spending Account
A Health Care Spending Account (HCSA) is a health and dental benefit administration feature that can be part of a traditional or flexible benefits plan. It operates in a similar fashion to a bank account:
- Manulife opens an account for each plan member with an HCSA
- Manulife credits each plan member’s HCSA with the HCSA balance he or she is eligible to receive
- Plan members use the HCSA balance to pay for eligible health and dental expenses which are not otherwise covered by their group benefits plan
Plan members submit health and dental expenses against the account until the balance is zero or is no longer available for use.
HCSAs are an effective tool to assist plan sponsors in managing overall plan costs. With an HCSA a plan sponsor can:
- Limit liability while increasing benefit flexibility
- Retain benefits at a predetermined level instead of providing additional coverage through their core plan
- Help provide employees with greater satisfaction
For the HCSA to be a non-taxable benefit to plan members, the HCSA must have an element of risk. Canada Revenue Agency's (CRA) interpretation bulletin - IT-529 states:
“One of the criteria for a Private Health Services Plan (PHSP) is that the plan must be a plan of insurance. In order for a HCSA to qualify as a plan of insurance, there must be a reasonable element of risk. If the plan is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP.”
In Quebec, the HCSA is a taxable benefit for provincial income tax purposes.
The Income Tax Act (ITA) guidelines for HCSA balances are stated in CRA Interpretation Bulletin 529 and require that:
- Each plan member’s HCSA balance must be determined at the beginning of the HCSA plan year, and the allocation can’t be changed during the year unless a major life event occurs
- Unused HCSA allocations can’t be refunded at the end of the HCSA plan year or when employment ends
The ITA guidelines for carryover are in CRA Interpretation Bulletins and require that:
- An HCSA can allow a carryover of an unused HCSA balance for up to one year or a carryover of non-reimbursed HCSA claims for up to one year, but not both
- All plan members within the same plan must be given the same carryover rule
When a plan member has an unused HCSA balance at the end of the HCSA benefit year, it is brought forward into the next HCSA benefit year and is available for 365 days after the end of the plan year.
Carryover period is always 365 days after the end of the plan year. This is the maximum allowable under CRA ITA guidelines
When a plan member has claims that cannot be submitted under an HCSA because the balance has reached zero — or the balance is no longer available — the claims can be submitted to the following benefit year’s HCSA. HCSA funds are forfeited at the end of the HCSA year.
Carryover period is always 365 days after the end of the plan year. This is the maximum allowable under CRA ITA guidelines.
Taxable Spending Account
A Taxable Spending Account (TSA) is an employer sponsored account holding funds allocated to an employee, but that does not offer the same tax advantages as a Health Care Spending Account (HCSA). Unlike an HCSA, TSA paid claims are added to the taxable income of plan members.
A TSA account gives the plan sponsor added flexibility to cover health, dental, and wellness expenses that are not traditionally covered under the core benefits policy. A TSA is similar to a Health Care Spending Account (HCSA) in that the employer sets aside a certain amount of funds for employees to use towards health, dental and wellness expenses each year. The difference is that TSA paid claims are added to the employee’s taxable income for the plan year. Deposits are made annually and funds cannot be carried forward to the following plan year.
The Manulife TSA product offers plan sponsors either a standard or customized solution.
The standard product offering has a predefined list of eligible expense categories with specific items listed in each category as eligible expenses.
The customized solution allows the plan sponsor to select additional, predefined expense categories, or remove expense categories from the standard offering. In addition, if the sponsor wishes to add expense types to any of the categories, this will also be viewed as a customized solution. The customized TSA product will allow clients to define the list of items or services that can be paid through the TSA.
The following features apply to both the standard and customized TSA solutions:
- The TSA product will not be offered on a stand-alone basis.
- The TSA will have a separate ASO policy number.
- A minimum annual allocation per member is required.
- No carryover provision.
- Grace period of 30 days.
- Annual submission of TSA member deposits.
- Annual member level report of TSA paid claims to be provided to plan sponsor for the purposes of T4 tax reporting.
- T4 tax reporting requirements will be the accountability and responsibility of the plan sponsor.
- Online TSA member level support for account balance and claims history information.
- A separate claim form for TSA claim submission.