Module 7 - Managing Extended Health Care Benefits

Question 1

Outline the common features of group EHC plans.

Answer 1

Group EHC plans commonly include these features:

(a) Expenses are limited to those that are medically necessary, which may include a requirement for a referral by a physician.

(b) Reimbursement is limited to the cost that is reasonable and customary for a specified service or product within a region.

(c) Eligible expenses may be subject to a limit or maximum, including the incorporation of cost-sharing measures such as deductibles and coinsurance.

(d) Covered expenses may include costs for hospital, drugs, private duty nursing, paramedical practitioners, professional licensed ambulance, out-of-country or out-of-province/territory services, travel assistance, vision care, hearing aids, accidental dental and miscellaneous medical supplies and services.

Question 2

Explain why a benefits schedule for a group EHC plan differs from a benefits schedule for group life insurance and group disability benefits.

Answer 2

A benefits schedule for a group EHC plan differs from a benefits schedule for life insurance and disability benefits because an EHC plan includes a multitude of benefits, each with its own provisions. The benefits schedule may include deductibles, coinsurance and maximums per covered individual. Claims are adjudicated in accordance with the benefits schedule, and eligible claims expenses are limited to reasonable and customary charges. In contrast, in life and disability benefits schedules, the range of benefits payable is narrower, benefit amounts are predetermined, and provisions like deductibles and coinsurance are not included.

Question 3

Contrast an annual deductible and a per prescription deductible.

Answer 3

An annual deductible can be applied on a calendar-year basis, from January 1 to December 31. Some plans administer an annual deductible based on plan year. For example, if the plan year begins on April 1, the deductible is applied during the period April 1 to March 31. A per prescription deductible applies to drug benefits and applies each time a prescription is filled. If the drug plan includes a pay-direct drug card, it is applied at the point of purchase. If the drug plan is on a reimbursement basis, the deductible reduces the reimbursement amount. A per prescription deductible can also be in the form of a dispensing fee deductible, with the amount of the dispensing fee deducted from the reimbursement amount.

Question 4

Explain how split coinsurance (sliding coinsurance) is applied in group EHC plans.

Answer 4

The coinsurance percentage under group EHC plans typically ranges from 50% to 100%. For plans with less than 100% coinsurance, the plan member pays the balance. For example, in a plan with 80% coinsurance, the plan member pays 20%. With split coinsurance, eligible expenses are subject to a coinsurance below 100% until the plan member incurs and pays a certain amount of eligible expenses (referred to as the “out-of-pocket maximum”). After that, the plan pays 100% of all eligible expenses for the remainder of the contract year. Out-of-pocket maximums are added protection to covered individuals who incur significant claims due to serious medical conditions.

Question 5

Describe the types of benefit maximums that may be included in group EHC plans and provide examples.

Answer 5

Two types of benefit maximums may be included in group EHC plans—internal limits (also known as “inside limits” or “internal maximums”) and overall maximums. Internal limits are benefit maximums applied annually, every two years, over the eligible individual’s lifetime, or some other frequency, depending on the type of expense. For example, vision care benefits may be subject to a two-year maximum, hearing aids to a five-year maximum and out-of-country benefits to a lifetime maximum. Internal limits protect the health care plan from overutilization or disregard for the cost of benefits. An overall maximum may apply to total benefits payable. The most common type of overall maximum is the lifetime benefit applicable to out-of-Canada emergency medical claims. For example, a lifetime maximum of $1,000,000 may apply to all eligible out-of-Canada expenses reimbursed from the time of the plan member’s entry into the plan until their coverage ends.

Question 6

Explain how reasonable and customary charges are applied in group EHC plans.

Answer 6

Most group EHC plans pay eligible health care services on the basis of a reasonable and customary charge (or reasonable and customary maximum) for the specific service or procedure. Each insurer sets a schedule that lists this limit and uses it to determine the maximum eligible expense for a particular service or procedure. Generally, a reasonable and customary charge falls within the range of fees normally charged in a geographic location for a given service, treatment or procedure performed by eligible health care professionals who have similar education and experience. Insurers usually define a “reasonable and customary charge” to be the lowest of:

(a) A price that is common in the area where the treatment was provided

(b) A price published in a fee guide for a given professional association

(c) The maximum price established by law.

Question 7

Identify how insurers generally define “hospital” in a group EHC plan.

Answer 7

The general definition of a hospital in a group EHC plan is a public facility that:

(a) Is licensed to provide care or treatment for sick or injured patients, primarily while they are acutely ill

(b) Has facilities for diagnostic treatment and major surgery

(c) Provides 24-hour nursing services.

Question 8

Identify hospital expenses that may be covered in a group EHC plan.

Answer 8

For a Canadian resident, the provinces and territories cover basic hospital and surgical expenses including accommodation at the ward level, services of physicians and surgeons, diagnostic procedures and drugs administered while an inpatient. EHC plans cover only the additional cost of accommodation above ward accommodation (i.e., semiprivate room or private room). Plans that cover the difference between semiprivate (or private) and ward accommodation may apply a dollar maximum or maximum duration.

Plans exclude facilities that are custodial in nature, such as nursing homes, rest homes, and homes for the aged or chronically ill. Some EHC plans cover care in a convalescent hospital, nursing home or rehabilitation hospital, generally subject to a minimal daily dollar maximum and a maximum duration. Plans define a convalescent hospital, nursing home or rehabilitation hospital as a place that:

(a) Has a transfer arrangement with hospitals

(b) Provides nursing care for the convalescent period of an injury or illness in accordance with minimum provincial/territorial regulations.

Question 9

Describe the conditions that drugs and medicines normally must meet to be covered in a group EHC plan.

Answer 9

EHC plans normally cover only drugs and medicines that:

(a) Are medically required

(b) Are prescribed by a physician or dentist. (More professions are being permitted to prescribe drugs, such as pharmacists, nurse practitioners, optometrists and midwives.)

(c) Have a drug identification number (DIN)

(d) Are dispensed by a registered pharmacist.

Question 10

Contrast elements of a group EHC plan designed on a prescription drug basis and a group EHC plan designed on a prescribed drug basis.

Answer 10

A group EHC plan designed on a prescription drug basis generally only covers drugs that legally require a prescription. This coverage typically includes drugs prescribed by a physician or dentist (and increasingly other professions such as pharmacists, nurse practitioners, optometrists and midwives) and dispensed by pharmacist, if a prescription is normally required by convention. Examples of such drugs that a plan may consider eligible for coverage if prescribed by an approved professional include injectable drugs, serums and vaccines used to prevent diseases and administered by a qualified individual, oral contraceptives, and life-sustaining drugs for the treatment of specified ailments (e.g., diabetes). This is the most common approach.

While this is increasingly rare, some plan sponsors offer “prescribed drug” plans. A “prescribed drug” plan is more liberal than a “prescription drug” plan because it covers over-the-counter drugs that would not normally require a prescription, if they are prescribed by a physician or dentist and dispensed by a pharmacist.

Question 11

Explain how generic substitution usually operates under a prescription drug plan, and contrast it with therapeutic substitution.

Answer 11

When plan members purchase a brand-name drug and a generic substitute is available, a generic substitution provision allows insurers to reimburse only up to the cost of the generic drug. A generic equivalent drug is a drug with the same active ingredients as the brand name, usually available at a lower cost. There are generally two types of generic plans available:

(1) Voluntary generic substitution. Payment is based on the generic equivalent unless the physician indicates “no substitution” on the prescription.

(2) Mandatory generic substitution. Payment is based on the generic equivalent even if the physician indicates “no substitution” on the prescription. In practice, this type of plan usually has an exception process built in for members who require the brand-name drug for medical reasons (such as adverse reaction to the generic), but reimbursement is subject to the insurer’s approval.

Therapeutic substitution programs cover only drugs within the same therapy class as the prescribed drug but that are less expensive. Drugs with different active ingredients but the same therapeutic classification as those prescribed are included in therapeutic substitution lists, and the actual prescribed drug is replaced with one from the substitution list. Typically, targeted drug classes are those with high utilization of brand-name drugs and at least one generic drug in the therapeutic class. Operating a therapeutic substitution program requires a managed formulary where the clinical teams of the insurer monitor drugs currently offered and those coming to market to maximize these substitution opportunities.

Question 12

Describe case management programs, preferred pharmacy networks and specialty drug programs.

Answer 12

Case management programs are based on a disease management model and provide support for plan members or their dependents who are being treated for chronic diseases with high-cost medications. These programs are not drug specific; rather, they focus on the medical condition. They provide a single point of contact to each plan member to ensure that they are taking the right drug, they understand their treatment plan and expected results, and they adhere to their treatment.

A preferred pharmacy network (PPN) enables covered individuals to obtain prescription drugs from participating providers based on predetermined charges or discounts negotiated between the PPN and the insurer or plan sponsor. Insurers, advisors, third-party administrators (TPAs) and plan sponsors partner directly with pharmacies to offer preferred dispensing fees and/or drug ingredient costs to plan members.

Specialty drug programs are offered on either a mandatory or optional basis to plan members who have been prescribed high-cost specialty drugs (varies by insurer).

Question 13

Describe the three methods of drug claim payment.

Answer 13

(1) Reimbursement: The plan member pays the pharmacist when the prescription is filled and then submits a claim to the insurer for reimbursement.

(2) Pay-direct drug card: The covered individual presents a drug card to a participating pharmacist at the point of purchase and pays for any deductible and/or coinsurance. A “participating pharmacist” is a pharmacist with whom an insurer and/or a drug network provider has a contractual agreement to provide drugs to covered individuals on specified terms. The pharmacist charges the insurer directly for the balance and the insurer pays the pharmacist directly. With electronic claims adjudication, a pay-direct drug claim can be paid in real time.

(3) Deferred drug card: This approach is similar to a pay-direct drug card, except that the plan member pays the entire cost at the point of purchase and is later reimbursed by the insurer (or other provider). The reimbursement process is simplified for plan members because they do not need to submit a form for reimbursement. Insurers generally reimburse after a certain dollar amount or time period threshold (e.g., $50 or 30 days).

Question 14

Explain the purpose of a drug utilization review (DUR) and describe how it works.

Answer 14

Insurers can use a DUR to monitor the prescription drugs that plan members use. Prescription drug information is entered at the point of purchase and reviewed against prescription history and other data to identify potential drug therapy problems and pharmacies’ dispensing practices. A DUR can flag drug interactions, duplicate therapy, duplicate drugs, premature refills and potential adverse reactions. If a DUR reveals that filling a prescription may pose a health hazard, the pharmacist receives an online message and then contacts the plan member or their physician.

Question 15

Describe private duty nursing care coverage that may be provided in a group EHC plan.

Answer 15

A group EHC plan may offer benefits for private duty nursing care or in-home nursing care (i.e., nursing care to a covered individual who is not in a hospital). Coverage generally only applies for nursing care that is recommended by a physician and performed by a registered nurse (RN) who is not related to the covered individual and does not live in that individual’s home. Plans may allow coverage for other types of less expensive nursing care by licensed or registered practical nurses, registered nursing assistants or members of the Victorian Order of Nurses, or they may cover RN services only if a less qualified nurse cannot provide the level of care required. There is usually a benefit maximum for a specified period (e.g., $5,000 to $25,000 per calendar year). This benefit is not usually subject to the plan deductible and coinsurance amounts.

Question 16

Describe paramedical practitioners coverage that may be provided in a group EHC plan.

Answer 16

Paramedical practitioners include psychologists, physiotherapists, chiropractors, massage therapists, speech therapists, osteopaths, podiatrists and chiropodists. These benefits are generally subject to the plan’s deductible and coinsurance. Benefit maximums range from $300 to $1,000 per type of practitioner, with the most common maximum at $500. Plans can implement combined annual maximums in addition to or in place of these per practitioner maximums.

While plans traditionally covered some of these services (e.g., psychologist, physiotherapist, speech therapist and massage therapist) only if recommended by a physician (a “referral”), in most cases this requirement no longer applies.

Question 17

Describe emergency out-of-country or out-of-province/territory coverage that may be provided in a group EHC plan.

Answer 17

Out-of-country or out-of-province/territory benefits in a group EHC plan cover expenses required when a medical emergency occurs while the covered person is temporarily travelling outside Canada or their province/territory of residence for any reason. There are usually limitations on the number of days plans cover, ranging from 60 to 180 days per trip and subject to a fixed dollar maximum. Some insurers do not impose a maximum time period, providing coverage as long as provincial/territorial coverage remains in place. Benefits are payable only if an individual has provincial/territorial health insurance plan coverage or equivalent coverage (e.g., the individual has coverage under an inpatriate benefits plan while waiting for provincial/territorial coverage). The definition of “medical emergency” varies by insurer, but generally involves a situation that results from an accidental injury or an unforeseen acute illness. The individual must have been medically stable, typically for a 90-day period before travel, for the plan to cover treatment.

Question 18

Identify types of coverage that may be provided in a group EHC plan for emergency out-of-country or out-of-province/territory expenses.

Answer 18

Coverage for out-of-country or out-of-province/territory expenses may include:

(a) Treatment provided by a physician

(b) Diagnostic x-rays and laboratory services

(c) Hospital accommodation, usually in a standard ward or semiprivate room, or intensive care unit, if required

(d) Medical and paramedical supplies and services provided during hospitalization

(e) Hospital and nursing services and medical supplies provided on an outpatient basis

(f) Medical evacuation.

Question 19

Identify coverage that may be provided in a group EHC plan for vision care and hearing aids.

Answer 19

Vision care benefits pay for eyeglasses, including frames and lenses, as well as contact lenses. Plans usually exclude safety glasses, prescription sunglasses and antireflective coatings. They may include coverage for laser eye treatment. Benefit maximums typically range from $200 to $300 every 24 months, with some plans providing coverage every 12 months for dependent children under age 18. Vision care benefits are not normally subject to deductible or coinsurance, given the low benefit maximums. Most vision care plans also cover eye exams once every 12 or 24 months when the provincial/territorial plan does not cover these expenses, subject to either a fixed dollar maximum or the reasonable and customary charge.

Plans may cover the cost of hearing aids, including repair when recommended by a general practitioner or an otolaryngologist, also called an ear, nose and throat (ENT) specialist. The benefit dollar maximum usually applies to a longer period of time than for other health benefits, for example, three to five years. This benefit is normally subject to deductible and coinsurance.

Question 20

Identify coverage that may be provided in insured and self-insured group EHC plans for plan members who become totally disabled.

Answer 20

Insured group EHC plans may include a provision to continue coverage for an eligible plan member who becomes totally disabled, as defined in the group insurance contract. Coverage may continue with payment of premiums, although some insurers waive the premiums. If the plan sponsor terminates the group contract when an insured person is totally disabled, benefits usually continue to be paid for eligible health care expenses related to the total disability for a maximum period after the date of termination, usually from 90 days to one year, while the person remains totally disabled.

Self-funded administrative services only (ASO) plans can offer the disabled plan member provision at the plan sponsor’s discretion. The plan sponsor covers the cost to extend health coverage for disabled plan members.

Question 21

Describe the types of exclusions and limitations typically included in a group EHC plan.

Answer 21

Group EHC plans are integrated with hospitalization and other medical services and supplies covered by government plans, and these plans do not pay for claims relating to benefits that Workers’ Compensation (WC) covers. Exclusions and limitations apply when the payment is:

(a) Prohibited by law

(b) For any services or supplies that a covered individual may obtain as a benefit under any provincial/territorial health insurance plan, or any other governmental plan such as Workers’ Compensation

(c) For any services or supplies that would have been provided at no charge in the absence of coverage

(d) For any services and supplies associated with a covered item but not specifically listed as eligible for coverage in the group contract

(e) For services and supplies received outside of Canada, except for those covered and provided under the out-of-country provision in a group contract

(f) For expenses resulting from intentional self-inflicted injury, the commission of a criminal act by the covered individual, an act of war, voluntary participation in an insurrection or riot, or injuries suffered while serving in the armed forces

(g) For experimental drugs and medical procedures or treatments.

Question 22

Contrast the use of plan member premium contributions to the use of deductibles as a cost-containment approach for group EHC plans.

Answer 22

One example of cost sharing is a requirement that plan members contribute toward the premium cost of a plan. In this case, all plan members share in the cost of the plan regardless of whether or not they use it (i.e., whether or not they make a claim). Plan members make their contributions through payroll deductions. Contributions may be a percentage of the total insurance premium or a fixed dollar amount. The drawback to this approach is that plan members may view their contribution as an investment and use the plan more than they otherwise would have, so they get more back in reimbursed claims than they pay in premiums.

Deductibles mean plan members participate in the actual cost of an expense that they or their dependents incur; they apply only to insured individuals who make a claim. Deductibles may inhibit unnecessary use of plan benefits and the submission of claims for very small amounts. They reduce premiums for a given set of benefits because the plan pays less of the cost. Premium savings eventually pass to the plan sponsor (and plan members, to the extent they pay part of the premium cost), although the effect is really to shift some of the cost burden from the plan sponsor to the plan member. Deductibles are equitable in the sense that the amount that insured individuals pay is related to the health services they use (i.e., insured individuals who do not use the service do not pay).

Question 23

Explain why a plan sponsor may choose coinsurance as a cost-containment approach over deductibles.

Answer 23

Deductibles tend to remain at original amounts for long periods; their impact erodes as inflation and utilization increase over time, thereby increasing the plan sponsor’s proportionate share of the cost and reducing plan members’ proportionate share of the cost. This is called deductible erosion. While plan sponsors can increase deductibles, this will be evident to plan members and they may see it as reducing the value of the plan.

Coinsurance builds in changes in inflation and utilization. For example, for a benefit reimbursed at 80%, the plan member must pay the additional 20% regardless of how much costs have increased. The plan sponsor benefits because part of the increased cost is passed to the plan members without the plan sponsor having to communicate an increase.

Question 24

Outline the main methods available to plan sponsors for funding EHC plans.

Answer 24

The main methods used for funding EHC plans are:

(a) Insured nonrefund (also called “fully insured” or “nonrefund accounting”), either fully pooled or prospectively rated (the rating methodology used by insurers to set premium rates at the annual contract renewal)

(b) Insured refund (also called “refund accounting”)

(c) Self-insured with or without a pooling arrangement to limit financial exposure to higher-than-expected claims.

Question 25

Compare the usual funding arrangements for EHC plans for smaller groups (e.g., up to 150 lives) with midsized groups (e.g., 150-500 lives) and larger groups (e.g., 500 lives or more).

Answer 25

For smaller groups (e.g., up to 150 lives), benefits are usually insured under a nonrefund accounting arrangement, either fully pooled or prospectively rated. The claims experience of these groups is not predictable. With such a small spread of risk, they are not suitable for risk sharing and/or self-insurance, either from the plan sponsor’s or the insurer’s point of view.

For midsized groups (e.g., 150 to 500 lives), benefits may be insured under a nonrefund accounting arrangement, but the plan sponsor and insurer are more likely to accept some form of risk sharing as provided under a refund accounting arrangement. Alternatively, the plan sponsor may self-insure under an ASO arrangement.

Larger groups (e.g., 500 lives and over) have a sufficient spread of risk and more predictable claims experience results for most benefits and may be insured on a refund accounting arrangement or self-insured under an ASO arrangement.

Question 26

Outline the general definition of an HCSA.

Answer 26

With an HCSA, each eligible employee has access to an annual allotment of funds that can be used toward the reimbursement of health and certain non-health-related expenses not covered by government health insurance plans or other plans (e.g., association/individual health plans or other group plans). Generally, covered expenses also include deductible and coinsurance amounts and amounts in excess of benefit maximums, which would otherwise be an out-of-pocket expense for the plan member.

Question 27

Identify reasons a plan sponsor may choose to introduce an HCSA.

Answer 27

Reasons a plan sponsor may introduce an HCSA include:

(a) It allows the plan sponsor to offer a health-related benefit to plan members without being locked into providing a benefit that may become expensive and subject to unexpected utilization.

(b) It delivers benefits tax-effectively.

(c) It provides relief to employees if plan member cost sharing is increased through features such as deductibles and coinsurance.

(d) It allows plan members to claim expenses that would otherwise not have been reimbursable under the benefits plan.

(e) It allows the plan sponsor to eliminate coverage for predictable expenses, such as vision care, to reduce the potential for adverse selection.

(f) It applies a defined contribution approach vs. a defined benefit approach and can therefore limit the plan sponsor’s exposure to health care inflation, since the plan sponsor decides if and when to increase the amount of HCSA contributions.

(g) It allows a plan sponsor to test the concept of flexibility on a limited scale without committing to a broader, full-choice plan.

Question 28

Describe the three design features that must be included in an HCSA to introduce the element of risk required by the Canada Revenue Agency (CRA).

Answer 28

The CRA Interpretation Bulletin 339R2, Meaning of “private health services plan,” lists the basic elements a plan must include to qualify as a private health services plan (PHSP). This interpretation bulletin also applies to HCSAs. There must also be some chance that the plan member will forfeit some or all of the funds allocated to the account (i.e., just as any insured cannot recoup premiums paid for insurance coverage if the insured risk never occurs). The three plan design features that must be included in an HCSA to introduce the element of risk required by CRA are:

(1) Where plan members can elect the amount to be allocated to their HCSA, they must make these elections only once annually—that is, at the start of each plan year, plan members determine how many dollars or flex credits (whether new money or freed-up flexible credits) will be contributed to their accounts for the coming year. This allocation decision is irrevocable unless the plan member’s family status changes (e.g., because of marriage or the birth of a child).

(2) The HCSA must have a use-it-or-lose-it feature, which can be structured as one of three ways:

Credit (or balance) carry forward provision. Unused credits at year-end may carry forward to the following year, but credits still unused at the end of the second year are forfeited.
Expense (or claims) carry forward provision. Any expenses for a given year may carry forward and be reimbursed out of the following year’s account, but any unused credit balance is forfeited at the end of each year.
No carry forward of either credits or expenses into the next year.
(3) Plan members forfeit any unused HCSA credits when they terminate, retire or die.

Plan sponsors must include all three of these design features if an HCSA is part of a flexible benefits plan. If an HCSA is a standalone part of a traditional benefits plan, design features (2) and (3) apply.

Question 29

Explain why some group EHC plans require plan members to submit their claims to all group and individual benefits plans that cover them before submitting their claims to the plan administrator for reimbursement through the employer-sponsored HCSA.

Answer 29

This approach ensures that the expense is not covered under other plans and, if it is, facilitates the coordination of benefits. If another plan partially reimburses the eligible expense, the plan member can submit a claim form requesting reimbursement for the outstanding balance along with a copy of the explanation of benefits (EOB) for the portion of the expense already paid. This approach preserves the balance of an HCSA for the plan member.

Question 30

Lou Fielding’s employer’s benefits plan includes an HCSA of $300 per year. All HCSA credits are allocated at the beginning of the year, and Lou has not used any of his credits to date. Lou is also covered as a dependent under his spouse’s group benefits plan. Lou’s plan does not cover eye exams; however, his spouse’s plan provides coverage for eye exams to a maximum of $50 every two years with no deductible. Lou has his first eye exam claim in over two years and incurs an expense for eye exams of $130. Calculate how much he will pay out of pocket.

Answer 30

Reimbursement from Lou’s plan $ 0
Reimbursement from Lou’s spouse’s plan $50
Reimbursement from Lou’s HCSA $80
Lou’s claim would be fully reimbursed, and he would have no out-of-pocket expenses.

Question 31

Describe the plan design and administrative issues a plan sponsor should consider when deciding whether to introduce an HCSA.

Answer 31

Plan design and administrative issues a plan sponsor should consider when deciding whether to introduce an HCSA as part of a traditional or flexible benefits plan include:

(a) Administrative effort. A plan sponsor should weigh the administrative effort involved in implementing an HCSA against the value a plan member will gain from the account.

(b) Funding. The plan sponsor must decide how to fund the account (new money or money freed up from benefits trade-offs or both). The plan sponsor must also decide how to deal with unused HCSA credits at year-end (i.e., using credit carry forward, expense carry forward or no carry forward).

(c) Impact of plan member choice. An HCSA can affect a plan member’s other benefit choices in a flex plan, and plan sponsors should communicate this to them. Plan members can use pretax dollars to pay for expenses through an HCSA that would normally be out-of-pocket. As a result, a plan member who expects to incur no expenses in a particular benefits area, such as orthodontics, can choose a dental option that does not cover these services and then use the resulting freed-up flex credits for another benefits area they need.

If an HCSA is a standalone part of a traditional benefits plan, only the first two design features apply.

Question 32

Outline the special recordkeeping functions required for HCSAs.

Answer 32

Special recordkeeping functions required for HCSAs are:

(a) Recording allocations of balances (plan sponsor contributions) to each plan member’s account
(b) Processing claims for reimbursement
(c) Handling the unused balance in terminated plan members’ HCSAs
(d) Processing year-end claims submitted during the grace period, effectively maintaining two sets of accounts
(e) Reporting activities to each plan member.

Question 33

Describe the criteria that must be met for an expense to be eligible for reimbursement under an HCSA according to CRA requirements.

Answer 33

The CRA Interpretation Bulletin 339R2, Meaning of “private health services plan,” also applies to HCSAs. Therefore, criteria an expense must meet to be eligible for reimbursement under an HCSA are:

(a) The plan must qualify as a PHSP under the Income Tax Act (ITA).

(b) Substantially all of the expenses paid under the HCSA must be eligible for the Medical Expense Tax Credit, as outlined in subsection 118.2(2) of the Income Tax Act, section 5700 of the Income Tax Regulations and Income Tax Folio S1-F1-C1.

Question 34

Identify the basic elements an HCSA must have in order to qualify as a PHSP under IT-339R2.

Answer 34

In order to qualify as a PHSP, an HCSA must contain certain basic elements. It must be an undertaking by one person to indemnify (reimburse) another person, for an agreed consideration, from a loss or liability in respect of an event the happening of which is uncertain (i.e., there must also be some chance that the plan member will forfeit some or all of the funds allocated to the account just as any insured cannot recoup premiums paid for insurance coverage if the insured risk never occurs).

Question 35

Explain why taxable spending accounts are not effective vehicles to reimburse health care expenses that could qualify as eligible expenses under an HCSA.

Answer 35

Taxable spending accounts do not have the same tax advantages as HCSAs. Since a taxable spending account does not qualify as a PHSP, any benefits received are taxable to plan members, and plan sponsors cannot deduct their contributions until benefits are paid. Since all benefits payments from the account are taxable, it does not make sense to use this account to reimburse health expenses that would otherwise be nontaxable to plan members.

Question 36

Provide examples of benefits that can be provided under taxable spending accounts that can contribute to plan member lifestyle needs and wants.

Answer 36

Taxable spending accounts can reimburse a wide range of non-health-related or other lifestyle expenses that are not eligible medical expenses under ITA, including computer hardware and software, cell phones, group home and auto insurance, group legal services, financial counselling, fitness clubs, sabbatical leave, subsidized parking, Registered Education Savings Plan contributions and executive perks. The range of benefits in this category is virtually unlimited.