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Here's what you need to know about a Health Spending Account Classification

Posted by K. Fry on April 6, 2015
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A Health Spending Account for a business with employees involves establishing classifications for spending limits.

Here's 5 things you need to know

1. What is a Health Spending Account Classification?

A classification is a means to help organize and separate different types of employees for a Health Spending Account.  Factors are varied but are usually based on seniority, salary, or tenure. Typical classifications include Executive, Senior Manager, Manager, Full Time.

2. How do they work?

The employer assigns a maximum dollar value per classification and enrolls individual employees.  Each employee in the classification will receive a spending account with the maximum dollar value assigned for the classification. 

3. How much should each classification receive?

Employers have the flexibility to determine the maximum annual spending account limit per classification. They can also elect to provide a rollover of unused dollars.  One general rule of thumb is to make sure the executive or shareholder classification does not receive more than 10 times the Full Time or the lowest classification.  

Example

Canadian Widgets Inc has 5 employees. The management team came up with four classifications (dollar value and employee count are included):

Classifications

Owner - $5,000 (1)

General manager - $2,500 (1)

Full time employees family - $2,500 (with dependents) (2)

Full time employees single - $1,000 (no dependents) (1)

A key benefit to a Health Spending Account for small business is the owner can more accurately budget and control cost. Here's the budget for Canadian Widgets in the upcoming year based on their classifications:

Budget

1 Owner: $5,000
1 General Manager: $2,500
2 Full time with dependants: $5,000
1 Full time no dependants: $1,000

Classification Total = $13,500

There would be an administration fee of 8% or $1,080.

Total annual Health Spending Account budget:: $14,580

4. How to fund the plan

Canadian Widgets needs to provide enough funds on a monthly basis to cover claims submitted by the employees. To do this, Canadian Widgets could deposit 20% of their total annual budget with the administrator in their claims funding account. This would be about $2,900.

5. Monthly top up of the claims funding account

Canadian Widgets will then replenish the claims account monthly. The Health Spending Account provider sets up pre-authorized withdrawal agreement to draw from Canadian Widgets bank account on the 1st of each month with the amount of the monthly withdrawal determined by Canadian Widgets.

The Beginner's Guide to Health Spending Accounts