Canadian Chpt 7, Flexible Accounts

Question 1

Health spending accounts

1. Requirements
2. Eligible expenses

Answer 1

1. Requirements for health spending accounts
   
   1. 1 annual elections - in advance of the plan year, irrevocable
      
      1. 1.1 if change in EEs family status, election hanged acceptable
   2. 2 Rollover/forfeiture
      
      1. 2.1 either a 1 year rollover of unused balances or unpaid claims
      2. 2.2 after 2nd year, unused amounts from the 1st year are forfeited
2. Eligible expenses: any health related expense eligible for tax credit
   
   2. 1 deductible, coins, practitioners, dental, facilities, devices

Question 2

HSAs replacing traditional health and dental

Advantages and disadvantages

Answer 2

1. Positives
   
   1. 1 employer contribution is fixed
   2. 2 tax-effective
   3. 3 provide flexibility
   4. 4 simple to administer and communicate
   5. 5 ER controls the growth of costs, EE controls use of funds
   6. 6 plan documentation straight forward
2. Drawbacks
   
   2. 1 inadequate coverage for large expenses
   3. 2 inequities for some employees
   4. 3 a flat contribution means family EEs receive relatively less
   5. 4 % of pay contribution means lower-paid EEs receive less

Question 3

Discuss taxation of personal accounts and perquisite accounts

Answer 3

1. Personal accounts
   
   1. 1 if deposits pretax, then items reimbursed count as taxable income to EE
   2. 2 otherwise, can roll indefinitely and cash out at termination of employment
2. Perquisite accounts
   
   2. 1 tax treatment depends on the type of perquisite
   3. 2 likely that unused amounts have to be paid out or forfeited at year end

Question 4

Discuss changes during the year in flexible accounts

Answer 4

1. Health spending accounts
2. 1 allocation made at start of year and irrevocable except for family status changes
3. 2 terminations: balance forfeited
4. 3 retirements: treated same way as terminations
5. 4 death: balance treated as if a termination has occurred
6. Personal accounts
   
   2. 1 family status changes: same approach as health accounts
   3. 2 terminations, retire, death: paid to the EE or beneficiary
7. Perquisite accounts
   
   3. 1 family status: no changes are necessary to the allocation
   4. 2 terminations, retirement, and deaths: paid or forfeited

Question 5

Why accounts are popular

Answer 5

1. Expand benefits with little additional ER cost
2. Offer benefit that might appeal to small segment of EEs
3. Contain costs
4. Test the appeal without committing to a full-choice program
5. HSAs can:
   
   5. 1 deliver compensation tax-effectively
   6. 2 encourage EEs to self-insure
   7. 3 replace existing coverage