Advisor Answers - nationalhealthclaim

Does my client qualify for an HSA?

An HSA (cost-plus) is intended as an employee (not shareholder) benefit. The receiver of the benefits should be actively engaged in the capacity of an employee. T4 income is recommended to help prove employment.

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ANDREW TALKS ABOUT THE SET-UP OF AN HSA:

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When a client gives their employees a Health Spending Account there needs to be a contractual obligation to reimburse eligible health and dental expenses. A written contract is always preferred but not necessarily required. There just has to be enough evidence that the obligation exists.

For example, your client (the employer) gives their employees details of the plan telling them that their eligible expenses will be paid out either by themselves or directly through a third party administrator, up to the limits of the plan.

National HealthClaim provides a contract of indemnity to all clients who sign up with their HSA and we recommend using a third party which we will discuss in another question further down.

Do you have to add employees?

No. Although the best setup of HSA’s include employees, it is not mandatory to add them. If you choose not to, the class that is receiving the HSA should clearly be defined and be receiving the benefit by virtue of employment, not shareholdings.

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Can you cover one shareholder/employee?

Yes, as long as you are able to prove you are working in the capacity of an employee within your business. This often means drawing some employment income (T4). The benefits paid under the plan should also be “reasonable.” What amount is considered “reasonable” is a question of fact.

If the plan has no limit or an unreasonable limit, then any benefit in excess of that “reasonable amount” will not be deductible by the employer but would continue to be excluded from the income of the employee. This eliminates the tax savings of the HSA, so it is important that limits be reasonable.

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ANDREW TALKS ABOUT WHAT IS CONSIDERED REASONABLE:

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Typically we are seeing a ten to fifteen thousand limit in place for families running a PHSP or an HSA with us, and that seems to be reasonable enough, and covers the majority of their expenses throughout the year. You don’t have to offer your employees this same amount, and in fact you can offer different amounts for different classes of employees. For example, your management staff versus full-time or part-time employees can all have different amounts.

Some companies recommend a ten percent rule but nowhere in the CRA tax bullets does it say anything that this is required. It may not be a bad guideline but the employer has the discretion to decide what amount to offer to which classes, and when they would like to do that.

Can you only cover upper management?

Yes, however if upper management includes shareholder/employees then it becomes questionable whether the benefit is received by virtue of shareholdings or by virtue of employment.

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ANDREW TALKS BEST PRACTICES:

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The best way to setup an HSA is to offer the HSA to all employees of the company, and that includes shareholders as well. This way CRA looks at the HSA as an employment benefit, and the benefit is non-taxable.

If you only want to offer the HSA benefit on top of another plan where the other employees are getting it but incentivize upper management or executives, that’s okay too as long as all executives or all upper management are receiving the benefit by virtue of employment and not just the shareholders in that specific class.

The last scenario is if a shareholder has more coverage under a plan than their equal same class employees or they decide to create a separate plan for them — it does become questionable whether or not they’re receiving the benefit by virtue of shareholdings versus employment. So you want to be very careful that these employees are set up as employees, potentially taking T4 income to prove employment.

What if all employees are shareholders?

Then it is reasonable to conclude the HSA coverage has been given as a part of a reasonable remuneration package, and is considered to be a benefit excluded from income as it was received by virtue of employment. As long as the limits are reasonable.

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ANDREW TALKS SHAREHOLDERS IN MORE DETAIL

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It’s important to to be careful with this one. Where all employees are shareholders, it’s reasonable to conclude the PHSP coverage has been provided as a part of a reasonable remuneration package, and still considered tax-free.

The reasonableness of the benefit is always a question of fact but it might be suitable to look at the benefits provided to employees in equivalent positions where the employee and the employer deal at arms length. CRA is really clear that if you do have a class of shareholders and there are other shareholders in that class that are receiving the benefit that are not actively engaged or receiving the benefit for virtue of employment, that this would be considered a taxable benefit and not deductible to the corporation. So this is one you want to be very careful with but ensure that everybody in the class, if they are all shareholders, are receiving the benefit by virtue of employment and not simply shareholdings.

Can we cover our board of directors? Some are active in the company and some do some consulting on a regular basis.

Yes. It should be determined in their director agreements that the HSA is part of the remuneration they are offering directors for their involvement with the company.

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We have a not-for-profit company. Can we have an HSA for our employees?

Yes. Not-for-profits can have employee benefit plans and an HSA falls within the definition of a PHSP (benefit plan). Those receiving the benefit are still employees, regardless of the entity they are working for.

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What if we want to run an HSA in-house instead?

CRA’s bulletins assume a PHSP is being administered by an insurer or Third Party Administrator (TPA). If not, the entity (in house) would have to make sure they have proper indemnity contracts, employee agreements, and CRA compliance when processing claims. They must also take steps to protect employee privacy. Further, employees may not be comfortable submitting personal expenses (like a drug), and even if they do, liability could be exposed if an employer knew what type of drugs their employees were on.

Third party administrators and insurers maintain confidentiality, allowing the privacy and goodwill of the benefit to stay intact.

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ANDREW COMPARES DIFFERENCE BETWEEN AN IN-HOUSE AND THIRD PARTY HSA

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Further to the very important privacy issues, and adjudication items that an in-house HSA typically falls very short on is — what happens in house when a controller is processing claims? Are they processing it to CRA guidelines? Are they coordinating it with a spousal plan, ensuring that the employees don’t double claim and aren’t underpaid or overpaid for their claims? How are the refunds being issued? Are they cutting cheques or are they adding these amounts to payroll? How much time is it actually taking?

If they are truly adjudicating, it’s taking a lot of time, and the admin fee the client would pay to a third party really isn’t making an impact if they run it out-of-house, and have it done by professionals. So we highly recommend doing it this way, and encourage all in-house HSAs to set it up properly with a proper contract, proper privacy, get all that in place.