Benefit Options for Canadian Business Owners: Health Spending Accounts (HSA) vs. Traditional Employee Group Benefit Plans (2024)

As a Canadian business owner, offering health and dental benefits to your employees is not just a way to ensure their well-being—it's also a strategic move to attract and retain top talent. In Canada, two primary options are available for providing these benefits: Health Spending Accounts (HSAs) and Traditional Employee Group Benefits Plans. This article will explore both options, helping you understand their features, benefits, and drawbacks, so you can make an informed decision that aligns with your business needs.

Ultimately, HSAs and Traditional Employee Group Benefit plans are just tools/solutions. The most appropriate solution depends on your unique business circumstances and what you are trying to achieve. In some cases the best approach isn’t just one or the other, but some combination of the two.

Health Spending Accounts (HSAs)

What Are They?

Health Spending Accounts (HSAs), historically more often referred to as Private Health Services Plans (PHSPs), are a tax-efficient method for Canadian business owners to provide health and dental benefits to their employees. HSAs are essentially budget accounts where a business allocates a specific dollar amount annually for each employee to spend on eligible medical and dental expenses.

How Do They Help Business Owners?

HSAs offer flexibility and cost control, as employers can set the contribution limits. These accounts are particularly appealing for small to medium-sized businesses due to their simplicity and the tax advantages they offer. Contributions made by the employer are tax-deductible as a business expense, and benefits received by the employee are tax-free.

Pros:

• Flexibility: Employees can use their HSA funds for a wide range of health-related expenses, offering them personalized coverage.
• Pre-existing Conditions: HSAs do not restrict, or limit benefits based on pre-existing medical conditions, offering inclusive coverage.
• Predictable Costs: Employers can control costs by setting fixed contribution amounts.
• Cost Efficiency: Employers only pay for the actual expenses incurred, avoiding the scenario of paying for unused coverage.
• Tax Efficiency: Contributions are tax-deductible for the business, and benefits are received tax-free by employees.
• Premiums: There are no regular premiums associated with HSA’s.
• Fees: Most HSAs operate on a fixed fee rather than a premium model.
• Deductibles & Copay: There are no deductibles with an HAS, and no co-insurance restrictions apply.
• Dollar & Visit Limits: There are no limits on the number of visits and treatments, offering greater flexibility. The only limit is the dollar amount offered to each employee.
• Age Limits: Employees who continue to work beyond traditional retirement ages (e.g. 65 or 70) can maintain their benefits coverage through an HSA until the end of their employment. This flexibility ensures that all employees, regardless of age, have access to the health and dental benefits they need, supporting a diverse and inclusive workplace.
• Plan Structure: HSAs offer a highly flexible plan structure, allowing customization in terms of limits and employee classifications.
• Streamlined Employee Onboarding: HSAs provide plan administrators with straightforward methods for adding new employees, allowing them to rapidly extend benefits to new hires. Additionally, customizable options like waiting periods, and pro-rating can be implemented, offering flexibility in how and when benefits are allocated.

Cons:

• Not Insurance: It’s important to understand HSAs are not insurance. They are an excellent way to pay for routine/predictable health an dental expenses, but should there be a large, unexpected expense (aka a ‘catastrophic’ expense) incurred by an employee then it may be preferable to have true insurance coverage that would respond in such a scenario. E.g. large prescription drug claims.
• Employee Attraction and Retention: Employers might discover that to appeal to and keep the desired employees, there's often an anticipation for the provision of more conventional insurance benefits.

Traditional Employee Group Benefits Plans

What Are They?

Traditional Employee Group Benefits Plans are comprehensive insurance packages offered by insurance companies that provide coverage for a wide range of health and dental expenses, as well as other benefits such as life insurance, disability insurance, critical illness insurance, and accidental death and dismemberment.

How Do They Help Business Owners?

Offering a traditional group benefits plan can make a business more attractive to potential and current employees, enhancing recruitment and retention. These plans provide extensive coverage, ensuring employees have access to necessary health services, which can lead to improved overall health and productivity.

Pros:

• Comprehensive Coverage: These plans offer broad coverage, including areas that HSAs might not cover – such as life insurance, disability insurance, critical illness insurance, and accidental death and dismemberment.
• Employee Attraction and Retention: Offering a comprehensive benefits package can make a company more appealing to high-quality candidates and help retain existing staff.
• Predictable Costs: Premiums are typically fixed for a year, making budgeting easier for employers.
• Streamlined Employee Onboarding: Traditional employee group benefit plans provide plan administrators with straightforward methods for adding new employees, allowing them to rapidly extend benefits to new hires.
• Cost Efficiency through Scale: The cost-effectiveness of Traditional Employee Group Benefits Plans improves with organization size, due to economies of scale. This works in the favor of larger employers making costs more predictable and efficient for larger organizations.
• Tax Efficiency: Like HSAs, health and dental benefits are tax-deductible for the business, and benefits are received tax-free by employees. Other benefits however, such as life and disability insurance are taxable benefits if premiums are paid by the employer and added to the employee’s income for tax purposes.

Cons:

• Higher Costs: Traditional plans tend to be more expensive than HSAs due to the additional coverage and benefits they provide (over and above just health and dental).
• Annual Renewal and Variable Costs: Traditional Employee Group Benefits Plans are subject to annual renewal, during which premiums can fluctuate based on the group's claim history and demographic shifts. This variability can make it challenging for employers to predict costs year-over-year, particularly smaller organizations.
• Cost Efficiency: Employers pay premiums in advance of the benefits being consumed. This can sometimes result in premiums paid for benefits that go unused.
• Less Flexibility: Employees have less control over their benefits, as the coverage is predefined by the plan.
• Age Limits: Traditional employee group benefits plans often come with age restrictions, typically ceasing or significantly reducing coverage once an employee reaches the age of 65 or 70. This presents a challenge in providing continuous coverage for older employees, potentially impacting their access to essential health and dental benefits as they approach retirement.
• Additional Complexity: While Traditional Employee Group Benefits plans tend to offer a more comprehensive range of coverages, including Life Insurance, Disability Insurance, and Critical Illness Insurance, this introduces added complexity. Complexity also arises from various restrictions on Health and Dental benefits, such as per visit maximums, annual maximums, deductibles, and co-pays, making the plans potentially more challenging to navigate and manage for employees.

Hybrid Models:

A one-size-fits-all approach rarely meets the diverse needs of every organization. Recognizing this, many businesses turn to ‘hybrid models’ that combine the flexibility of Health Spending Accounts (HSAs) with the comprehensive coverage of Traditional Employee Group Benefits Plans. This blended approach offers a nuanced solution that can cater to the varied preferences and requirements of both employers and employees.

Hybrid Models in Employee Benefits: A Comprehensive Overview

There are two primary configurations or approaches to the hybrid model:

1. "HSA with Insurance Add-ons" and
2. "Traditional Employee Group Benefits + HSA" (often referred to as a Health Care Spending Account or HCSA)

HSA with Insurance Add-ons

Offered by HSA providers, this model centers around the HSA, covering routine and predictable health and dental expenses, supplemented by optional insurance add-ons for catastrophic risks. These add-ons typically cover significant prescription drug costs, life insurance, accidental death and dismemberment, some travel insurance, and potentially critical illness insurance. A notable limitation is the usual absence of disability insurance, a critical component of a comprehensive benefits package.

Traditional Employee Group Benefits + HCSA

Offered by traditional insurance providers, this model uses standard health and dental insurance for regular expenses, complemented by essential insurance coverages like life insurance, accidental death and dismemberment, long-term disability (LTD), critical illness, and travel insurance. The HSA component provides additional flexibility for expenses not covered by the primary insurance plan. Many insurers enhance this model with integrated digital platforms (mobile and web), allowing employees to manage both their insurance and HCSA benefits through a unified interface.

Key Considerations

• Comprehensive Coverage: Both models ensure a wide range of health, and dental needs are met, from everyday expenses to unexpected medical events.
• Flexibility vs. Security: The HSA with Insurance Add-ons model emphasizes flexibility and is a competitive alternative to traditional plans, lacking only in disability insurance. The Traditional + HSA model offers comprehensive coverage, including disability benefits.
• Ease of Use: The integration of digital platforms in the Traditional + HSA model simplifies benefit management for employees, providing a seamless experience across both components.
• Scalability and Suitability: The most appropriate approach will depend on the current size, and trajectory of the business (more below).

Tailoring Hybrid Models to Organizational Size

Key Consideration: Matching Model to Organizational Growth

HSA with Insurance Add-ons for Small Entities: Ideal for small organizations (e.g., 5 employees or less) and startups, this approach offers predictable and manageable costs, which is critical for businesses starting out with tight budgets. As these entities grow, reevaluating their benefits strategy to potentially adopt a "Traditional Employee Group Benefits + HCSA" model may align better with their evolving needs.

Traditional Employee Group Benefits + HSA for Growing Organizations: Suited for slightly larger organizations (e.g. 5 employees or more), this model accommodates the inclusion of important insurance benefits like long-term disability (LTD). The additional costs associated with traditional plans are generally more feasible for these organizations. Additionally, those organizations that find themselves in rapid growth phases, might consider the traditional employee group benefits plan a strategic starting point.

Universal Appeal of HSAs: Regardless of size, organizations will find value in incorporating an HSA due to its flexibility, employee appreciation of the benefits, and favorable tax treatment. This adaptability makes HSAs a beneficial component across all stages of organizational growth – from a single self-employed/incorporated individual to a business with thousands of employees.

Conclusion

Ultimately, the choice between leveraging an HSA-based approach or a traditional group benefits plan — or a strategic combination of both — hinges on assessment of your business's specific circumstances. By prioritizing either flexibility and cost savings with HSAs or the broader coverage offered by traditional plans, you can craft a benefits strategy that not only meets the immediate needs of your business but also supports the long-term health and productivity of your workforce.

Employee benefits planning is essential for fostering a supportive work environment and positioning your company as a desirable place to work, capable of attracting and retaining top talent in a competitive landscape.

Advisors at Garrett Agencies are available to assist in making the most appropriate decision for you and your business, ensuring that your benefits strategy aligns with your organizational goals and employee needs.