A small business benefits plan can consist of several different types of benefits. For the purpose of this article, we will focus on health related benefits.
What is a benefit?
I’ve found this question easier to answer by understanding what a benefit is not. Employees paying a premium in a traditional ‘insurance plan’ is not a benefit. The online dictionary defines a benefit as “an advantage or profit gained from something”. Employees recognize this, which is one reason for low employee participation in a premium plan. If I must pay for a benefit, it is not a benefit.
With a Health Spending Account (HSA), there are no premiums. The employer decides how much is available to put into a benefit plan. Benefits are based on budgets and what the employer would like to provide in the way of benefits for themselves and their employees. An HSA can be thought of as a bucket of money provided by the employer to the employees. The employees use their individual benefits bucket to claim all their health and dental bills, up to their benefit bucket limit, set by the employer.
The employer is also included and makes use of the plan the same way, assigning their own benefit bucket limit. Claim reimbursements paid out of the benefit buckets to employees are tax-free. The payout to the employee is a pre-tax expense for the employer. The employer does not pay anything until the employee claims from their benefit bucket. This makes an HSA easy to understand, with all the benefit available when and where it is needed by the employee and their dependents.
What is health insurance?
To answer this question, we need to define insurance. An online dictionary I found defines it this way: “Insurance is coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” The online dictionary’s definition of peril is “serious and immediate danger".
In laymen’s terms - insurance is the transfer of risk away from the person to an insurer in exchange for a premium. The insured agrees to pay the premium in exchange for the promise to be reimbursed by the insurer if the unplanned event or peril happens in the future. Fire insurance on your home is a good example of the need for insurance. For most Canadians, the loss of a person’s home to fire is a catastrophic financial event.
In Canada, health insurance is provided by provincial governments. For example, the cost of doctor visits, hospitalization, surgery and medical treatment for accidents and illness is provided for and paid by the province in which a person lives. In that respect, if you are Canadian, being treated for a catastrophic health event caused by an accident or sickness is provided and paid for by your provincial government. This includes the cost of many drugs and drug therapies to treat illnesses and ailments.
The residual risk or ‘peril’ from an accident or illness is the interruption of income. Income replacement insurance or disability insurance and critical illness insurance replaces the lost income and provides immediate financial support. If the person dies, life insurance replaces the lost income for surviving dependents and family.
Health and dental services falling outside of the above risks, such as chiropractor, massage therapy, naturopathy, physiotherapy, dental, vision etc. and occasional prescription drug expenses are not financially catastrophic. They are not health insurance events.
Why do I feel that we are not getting value from our current health insurance plan?
That can be common sentiment with a small business benefits plan that is built around traditional insured health and dental plans. The premium paid by the employer for the employees, can be looked at as the employer’s budget for benefits for the year. I will refer to that budget as your ‘benefits budget bucket’.
Instead of paying it out monthly as a premium and losing control of it, you could instead allocate it to employees – directly, using an HSA plan. This smaller ‘employee bucket’ is assigned to employees from the employer’s benefit budget bucket. The employees decide when and how to use their individual benefit buckets for themselves and their families.
An HSA better meets the need of employees as follows:
- transfers the value from the employer to the employee directly
- it is easy to understand and use
- The value of an HSA is never lost in a premium to the insurer
- There is no expense for the employer until a claim is made by the employee for an eligible health or dental bill
- When the employee claims, they are reimbursed directly for 100% of the claim, tax-free, up to their benefit bucket limit
- The employee can claim all their health and dental bills as needed. See the list of eligible expenses here.
The employer also makes use of the plan, setting their own benefit bucket limit for themselves and their family. The employer limit can be set high enough to pay all their health and dental bills during the year. With an HSA, you have full control over your benefit budget without losing value in a premium.
What's the difference between an insurance plan and an HSA?
Please be aware that health and dental benefits are not insurance events. To understand, consider the difference between a planned maintenance event and unplanned event such as an accident.
Let us use an auto or home insurance policy as an example to clarify. We buy auto and/or homeowners insurance to insure for an unplanned catastrophic financial event. If you have an accident and your new car is a total loss, your auto insurance policy replaces the car. This has the effect of returning you to the position you were in (or as close as is possible) before the accident that destroyed your car. The same holds true if a fire destroys your home. Therefore, it can be said that we pay insurance premiums to protect ourselves from a potentially catastrophic financial loss occurring from an unplanned event.
At the same time, we know that planned maintenance – cleaning the car, changing the oil or replacing worn out tires, are events paid by the person that owns the car. It is the same for the homeowner, windows must be cleaned, furnace filters changed, and leaky water heaters or roofs repaired or replaced. We don't insure these maintenance events – although it might be a good idea to plan for their occurrence by setting aside a rainy-day fund.
Insurance is the process of transferring the risk of a financially catastrophic unplanned event to an insurance company. Maintenance can be summed up as planned events and unplanned (leaky hot water tank) and day to day expenses that are part of owning the car and the home.
Consider health and dental events. Going to the dentist, eye examinations, eye glasses, contact lenses, the chiropractor, the massage therapist, the orthodontist and physiotherapy are health maintenance events. Some are planned and some are unexpected. But they are not catastrophic accident events. They are in the same category as the car and house maintenance events.
Why then do we talk about insuring health and dental events? Health and dental ‘insurance’ is sold by insurance companies to market high cost, high margin, low value employer health and dental benefit plans.
How does an HSA compare to health insurance?
An HSA provides tax-free funds that employees use to pay for maintenance events (chiropractor, massage therapy, naturopathy, physiotherapy, podiatrist, dental, vision and occasional prescription drug etc.) that they incur. Employers only pay when a claim is made, there are no premiums, and the employer can customize a plan to suit their needs.
Health insurance under a private, traditional insured plan provides specified dollar amounts that are listed in a schedule of benefits. Employers pay a premium regardless of plan usage, coverage is restricted in a number of ways, and costs increase beyond the employer's control.
Remember, in Canada, trauma and treatment from catastrophic medical emergencies and accidents are covered and paid by provincial government health insurance. Maintenance events are not health insurance events. The concept of needing to buy health insurance for day to day maintenance events is a marketing fabrication by insurance companies.
What would be an ideal small business benefits plan for my company and employees?
An ideal set-up is allocating the employer’s available health and dental 'benefits budget' to an employee HSA. An HSA ensures that funds which are earmarked for employee health and dental benefits are received by the employee, not lost in a premium.
An HSA puts the benefit dollars into the employee’s hands. The employee and family then decide where and when to use the money as needed. This provides budget certainty for the employer and flexibility and choice for the employees. In many cases, not all benefit dollars are used resulting in savings for the employer.
By contrast, a traditional insured plan takes the decision of how and where to use the benefit provided by the employer away from the employee. Once the premium is paid, the value is lost. Not all employees use the plan and those who do have to deal with low limits, high co-payments and denied claims for items that are not on the insurer’s list of approved benefits.
Traditional plans add in other complexities and restrictions such as deductibles, dental fee guides, dental recall limitations and low coverage limits on items that can be claimed. The traditional plan removes the employee from the decision-making process.
The result is an inefficient, low impact, high cost plan with no choice for the employee and the inability to control prices and stay within a budget for the employer.
Note: The amount an employer should allocate to the HSA depends on many factors and is largely up the discretion of the company itself.
Are you a small business owner with a few employees? Consider exploring an HSA and see how it can help control your benefit plan costs while providing excellent coverage for your staff.
Are you an incorporated professional? Learn how to pay for your personal medical expenses through your corporation using a Health Spending Account.