The debate between the provinces and the feds about healthcare funding rages on. The question of who owns what remains at the core of the debate, but one undeniable truth underlies the discussion: We—as Canadians—cannot afford our current healthcare funding commitments. If we are going to sustain our healthcare system into the future, we are going to need to consider innovative approaches to treatment, delivery and, quite possibly, funding.
With this backdrop, it is difficult to rationalize the Canada Revenue Agency’s (CRA) recent policy directions related to employee benefits. As detailed in a Mercer communiqué dated Dec. 8, 2011, the CRA has made three policy changes that do not bode well for employee benefits plan sponsors. The policy changes are as follows:
Trading bonus to fund healthcare spending accounts — In the past, the CRA had allowed some flexibility in trading future bonus for flex credits, which could, in turn, be used to fund healthcare spending accounts (HCSAs). This was a great opportunity to enhance the flexibility of benefits programs without adding employer costs. But the CRA will no longer accept these arrangements.
Auditing private health services plans — There is some ambiguity in terms of allowable expenses under a private health services plan (i.e., extended health benefits, including HCSAs). The CRA and the insurance industry have different perspectives, with the CRA taking a more restrictive view. It appears now that the CRA has started to audit these programs, and, if anything is found to be offside, it may reassess all benefits under the plan to be taxable.
Disputes with the CRA — In the past, if the CRA found that a plan sponsor was inappropriately calculating tax on its benefits plan obligations, the employer could pay for any resulting tax liabilities without impacting the plan beneficiaries. Going forward, the CRA will reassess both the employer and employee as a result of an under-reporting of tax, thereby putting additional stress on plan sponsors to carefully consider the tax risks it takes in providing these benefits.
In short, it appears that the CRA is making it more challenging for plan sponsors to provide for benefits at a time when these plans have never been more important in supporting the health of Canadians. The bigger picture has somehow been lost within the complicated maze of public policy decision-making, and no one is connecting the dots on this important issue.
So, to provincial and federal governments alike—including the CRA—I offer the following suggestions:
• You need help. The cost of healthcare has the potential to cripple the Canadian economy and stand in the way of future economic prosperity. We’ve made promises that we simply cannot keep.
• The problem is not going away. The cost of healthcare is not going to go down anytime soon. In fact, it will only get worse. Demographics, for one thing, are not in our favour.
• Employee benefits plans are important in supporting the health of Canadians. And they will become increasingly more important as governments continue to struggle with their funding obligations. However, this struggle is not limited to public programs—employee benefits plan costs are also going up at significant rates. Plan sponsors cannot simply pay more; there needs to be added flexibility to get more money into these programs without adding more cost.
• Pre-tax dollars go further than after-tax dollars. The CRA is motivated to collect the tax revenue that it believes the government is owed. However, the solution to the healthcare funding issue is not to collect more tax revenue that may or may not find its way back into the funding of healthcare. The solution is to expand on the tax regime already in place for employee benefits and make it easier for employers and employees to pay for their healthcare expenses on a tax-preferred basis.
We need to reform not only the healthcare system but also the tax system to support the broader funding of, and investment in, the health of Canadians. We need to make it easier for employers to implement and fund benefits plans (including for retirees), and we need to make it easier for individuals to save for future medical costs not otherwise covered by the public system.
Health is everyone’s business. We need collaboration and co-operation, not regressive public policy.