The present and future of HCSAs and other consumer-driven healthcare products in Canada.
If your employees had a choice of where they could spend their benefit dollars, would they get more value from their plan? Plan members say yes. Studies show that allowing members to take responsibility for at least some of their spending decisions gives them the choice and control they want. Healthcare spending accounts (HCSAs) are one example.
Let’s take a closer look at where HCSAs and other consumer-driven products measure up in terms of employee needs today and in the future.
Changing With the Times
Since their inception almost 20 years ago, HCSAs have gained increased interest as plan sponsors continue to seek simpler, less risky solutions to reduce their financial exposure. At the same time, the need for attractive benefits programs is more critical than ever, as employers compete for an ever-shrinking employee talent pool.
Through the use of credits allocated by the plan sponsor, HCSAs allow plan members to claim health-related expenses that are not covered under their regular health and dental plans or to supplement existing coverage. An HCSA’s appeal is that it adds more flexibility for plan members while keeping costs to the plan sponsor at a predetermined, manageable level. It also encourages plan members to take ownership for making smart buying decisions, since they see their HCSA credits as a personal budget. The HCSA can also be designed in a number of ways to meet the needs of a specific workforce.
HCSAs can be offered as part of a traditional or flexible benefits plan. Originally, HCSAs were used mostly by larger organizations. Today, they have become more popular with smallersize employers that want to offer flexibility but may not be able to provide a full range of health benefits. The HCSA can provide a cost-effective option that plan members really value.
Rob Crofts, vice-president, group insurance operations, with Corporate Benefit Analysts, Inc., agrees. “We’re seeing some employers looking for ways to give plan members more choice, like having a higher aggregate maximum for all paramedical benefits combined, so plan members can choose the services they specifically need. Adding an HCSA as a new benefit is an extension of this approach. It sends the message that the employer wants to offer some flexibility and really cares.”
“We’re also seeing more employers looking to shift to a defined contribution model. For example, if there’s no premium sharing in the plan, the employer may decide to move to an employee-paid long-term disability benefit but turn some of the premium savings back to benefits employees through the HCSA. Or [the employer] might remove some of the smaller, more predictable benefits, such as vision care and paramedical coverage, and replace them with an HCSA. However, plan sponsors need to be realistic about how much they are hoping to save. If they are reluctant to aggressively pare down the insured plan offerings, it may be difficult to support an HCSA level that will be meaningful to the members. If sponsors go into it hoping to cut significant cost, they often end up disappointed.”
What the Research Reveals
LIMRA’s 2008 Employee Benefits in Canada survey of 1,500 plan members across the country found that 20% of benefits plans now offer an HCSA. Nearly 40% of the plan members polled rated their HCSAs as important or very important. Mercer’s 2007 Policies and Practices survey showed that 33.5% of the employers polled offer flexible benefits programs. Within those plans, the HCSA is the No. 1 choice for allocating unused flex credits—80% of plan members chose this option, about 15% more than the next highest allocation choice, taxable cash.
What are the advantages of an HCSA? For one, HCSAs provide plan sponsors with another tool for attracting and retaining employees. Benefits plans with flexibility and choice are an important part of a company’s value proposition. They also allow plan sponsors to limit coverage for predictable types of expenses, since members can plan ahead and save their HCSA credits to apply toward them. And HCSAs appeal widely across today’s multi-generational workforce, since they can address a diverse range of needs and wants. Finally, unlike taxable cash, HCSAs are a non-taxable benefit for employees (except in Quebec). Even smaller groups are now finding HCSAs a viable option, as administration has become more automated and cost-effective.
This does not mean, however, that HCSAs and similar products are an automatic fit for every plan. Plan sponsors must consider the following key questions, although the answers will largely depend on the organization’s values and HR strategies.
What information and education will plan members need to make the most of the HCSA? And what resources are available to develop and deliver such communication? If it is not properly communicated, members may not understand how to use the HCSA to its full potential and will be ill-equipped to make knowledgeable buying decisions.
Is the HCSA concept aligned with the organization’s culture? If plan members have not previously been encouraged to make decisions about benefits, introducing an HCSA may raise expectations about empowerment in other areas.
Are health or dental benefits being reduced or eliminated as a trade-off? If so, what is the risk that plan members will spend their HCSA credits on predictable expenses and find themselves with inadequate coverage for unexpected but necessary healthcare costs?
What about equity among plan members? Should those with families receive more HCSA credits? Should credits be allocated based on salary or seniority, or should all plan members receive an equal amount?
Building on the HCSA’s Versatility
The evolution of HCSAs has arguably paved the way for a variety of other defined contribution products and services that meet plan members’ need for flexibility. For example, the personal spending account (PSA)—also referred to as a taxable spending account, a wellness account or a lifestyle account—is a similar option to an HCSA. However, it meets a different set of needs and covers expenses that are ineligible under an HCSA.
The PSA is designed to help plan sponsors promote the physical, mental and financial well-being of plan members by focusing their spending on certain types of expenses. Plan sponsors can offer members a broad and comprehensive checklist of services to choose from, in areas as diverse as fitness-related services and equipment, child care or eldercare, financial and professional services, and educational and personal development. Though similar to an HCSA in some ways, the PSA is typically a taxable benefit for employees. Some PSAs include carry-forward limits, as HCSAs do, and some even allow plan members to take the balance in the PSA with them when they leave the plan.
HCSAs and PSAs can complement each other, especially under a flexible benefits plan. Some plan members may choose to allocate unused credits to an HCSA if they anticipate having eligible expenses in the coming year or two (allocated credits can be carried forward for only one benefit year). Others may opt to deposit their unused credits to a PSA and use them to support their wellness goals.
Another new consumer-driven product is the tax-free savings account (TFSA), which came into effect on Jan. 1, 2009. The TFSA is a tax-effective savings vehicle for Canadians age 18 and older to help them save for future goals and needs, including the growing need for individuals to fund more of their healthcare expenses down the road. Individuals can contribute up to an annual maximum of $5,000 in after-tax dollars to each TFSA. Any income earned on deposits is taxfree. Funds are accessible any time and are not taxed on withdrawal.
A group TFSA can be incorporated into a flexible benefits plan so that plan members can allocate the cash equivalent of their remaining flex credits to a TFSA (subject to payroll deductions)—another way to make a benefits plan truly flexible. HCSAs and PSAs help plan members cover current health expenses, while TFSAs can help them save for future healthcare expenses or other goals.
A Practical Example
Perhaps one of the best yardsticks to measure the popularity and versatility of today’s HCSA is the feedback of employers that have incorporated HCSAs into their benefits programs.
Siemens Canada Ltd. offers both HCSA and PSA products as part of its flex plan. Mary Bissette-Clarke, senior director, corporate HR, says, “It’s all about offering more choice and flexibility.” The company recently surveyed its employees on what they value in the workplace. “They love the flexibility the HCSA offers,” says Bissette-Clarke. “Different generations have very different needs, as do different family structures. From our perspective, giving options and choices means employees can fit our programs to their situations.” In discussing the PSA specifically, Bissette-Clarke adds that Siemens Canada introduced a PSA because “we had certain programs in place and we wanted to support even more options. We’re actually revisiting our PSA expenses to extend into wellness, so we can encourage employees to do more for their health.”
On the subject of advice that she might offer to plan sponsors considering an HCSA, Bissette-Clarke says, “First, plan sponsors should be clear about what they are trying to achieve. It’s really about designing a program that meets both the needs of employees and the business needs of the organization. It’s also important to understand how it will be perceived by employees. It takes time and energy to make changes to a benefits plan, so it’s important that employees see the value.”
Judging from recent industry data, trends indicate a bright future for consumer-driven products such as HCSAs, PSAs and TFSAs. The question remains: How will sponsors choose to offer these innovative products to plan members? As additional benefits options? Or, in the case of HCSAs and PSAs, as cost-cutting trade-offs for reduced health or dental benefits? The more knowledgeable that plan sponsors are about these products, the better equipped they will be to make the right choices for their programs.”
Dave Jones is vice-president, market development, group benefits, with Sun Life Financial.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the January 2009 edition of BENEFITS CANADA magazine.