Health Spending Accounts (HSAs) in Canada are a cost-effective and popular way for employers to offer health benefits to their employees. An HSA does two things very well: first, it allows employers to write off the health expenses of their employees and their families as a business expense, and second, it encourages employees to look after their everyday health needs (dentist, optometrist, drug prescriptions, etc.) by reimbursing them 100% of their health claims (up to a maximum) with tax-free money. Rewarding employees with high-impact, low-cost health benefits can create a strong return on investment for businesses large and small alike. For the smallest of businesses, calculating the return on this investment becomes very straightforward. For example, check out the costs savings available to a single owner-operator of a professional corporation.
Investing in the health and wellness of yourself and your employees can pay big dividends. The size of return on this investment necessarily depends on the fees of your chosen HSA provider. But posted fees do not tell the whole story. In fact, in many cases the fees advertised by HSA providers are dwarfed by hidden costs buried within their HSA plan structure.
Hidden costs of HSAs in Canada:
#1 Up-front deposits
The fact that many HSA providers require their customers to pre-fund their company HSA plans up-front is not hidden in the fine print, but the opportunity cost of this requirement is far from obvious to the many businesses in the market for a provider. This is unfortunate because the requirement to fund an HSA plan up-front can be the single biggest expense of operating an HSA, creating a significant drag on ROI compared to HSA providers like EasyHSA who do not hold employer funds on account.
Unlike for HSAs in the USA where plan contributions are owned by the employee, HSAs in Canada are owned by the employer. This means that the thousands of dollars held on account by your HSA administrator year after year is money that you cannot put to work in your own business or invest elsewhere. At any given time only a small percentage of these funds are actively being deployed to reimburse employee health expenses, and when they are deployed, up-front HSA plans must be quickly replenished. This means that a significant asset belonging to your company is being held static in perpetuity – doing nothing for you or your business.
So how much money are you leaving on the table by choosing an HSA provider that collects your HSA funds up-front and holds them on account indefinitely?
The opportunity cost of up-front deposits
Comparing an HSA provider like EasyHSA which has only a single 5% administration fee and no up-front deposits (or other fees) to a fictional HSA provider that requires only an up-front deposit and charges no fees at all, a plan with EasyHSA is still more economical. To illustrate this, let us take a small business with a maximum combined employee HSA benefit of $15,000 per year. With EasyHSA they would pay only 5% of approved claims, whereas with our fictional HSA provider they would miss out on an average 7% return (as might be achieved on average by a balanced investment portfolio over the long term) on their $15,000 deposit held on account. Provincial taxes charged on submitted claims in Ontario are not included in the table below because they would be identical for both plans.
|EasyHSA||Fictional “Deposit-Only” Provider|
|Total Claims Submitted||Total Fees (incl HST)||Annual Opportunity Cost (7%)|
|$ –||$ –||$ 1,050.00|
|$ 5,000.00||$ 282.50||$ 1,050.00|
|$ 10,000.00||$ 565.00||$ 1,050.00|
|$ 15,000.00||$ 847.50||$ 1,050.00|
As you can see from the table above, assuming a 7% rate of return on your money, the opportunity cost of having an HSA provider hold your maximum benefit amount in their bank account year after year can significantly outstrip the administration fees charged by a provider like EasyHSA – and even before taking into consideration that fact that these up-front HSA providers also charge fees. Importantly, this table also does not factor in the magic of compound growth, which when compounding at a 7% rate of return over a 10-year period nearly doubles the opportunity cost.
In addition to the considerable opportunity cost born by the necessity of up-front deposits, this form of plan structure strips customers of the flexibility to redeploy these financial resources to address a critical need. Up-front deposits also open the door to a second even more sinister hidden fee charged by some HSA providers: deposit forfeiture.
#2 Deposit forfeiture
Unbelievably, some HSA providers have small print that entitles them to confiscate unused HSA funds. For example unused funds of terminated employees or of employees who do not spend their benefit maximum each year must be “redeployed” to another employee’s HSA account or otherwise forfeited to the HSA provider. Structures such as this do not satisfy any legal requirement of an HSA (to the contrary, this approach appears legally dubious), nor does this account structure benefit either the employer or employee in any way. The purpose appears solely to enrich the HSA plan provider.
#3 Annual Fees
Some HSA providers in Canada charge annual fees, either in addition to or in place of claim administration fees. These HSA providers do not typically hide their annual fees in the small print, but the true cost of this fee might not be apparent at first glance. A $100 annual fee would pay for $2,000 worth of claims at our 5% administration fee ($1,960.78 in Ontario where Premium Tax applies to administration fees), whereas a $250 annual fee would pay for $5,000 worth of claims ($4,901.98 in Ontario). Since the vast majority of plan holders do not submit more than $5,000 worth of claims per year (and certainly not year after year!), annual fees allow can significantly outstrip a 5% administration fee.
#4 Mandated minimum benefit levels
A third commonly hidden cost of HSAs in Canada is the requirement by some HSA providers to set a minimum employee benefit level. Since there is no discussion of minimum benefit requirements in Canadian tax law, this requirement is simply a way for some HSA providers to pad their bottom line by encouraging employee spending. In reality, employers should be free to offer their employees whatever they deem appropriate. Of course, there is a requirement for “reasonableness” in Canadian tax law, but this is targeted towards the top employee class rather than the bottom. For example, giving the top employee class more than 10x the benefit of the lowest employee class is likely to raise an auditor’s eyebrow.
HSA providers like EasyHSA do not require benefit minimums, you are free to offer your employee classes whatever you feel is reasonable. The result? With EasyHSA more employers can offer their lowest employee class benefits, including part-time workers who are frequently excluded from more expensive benefit plans. Mandated minimum benefit levels work against you as the employer in two ways: by unnecessarily increasing your health benefit expenses while encouraging a less equitable distribution of health benefits to your employees.
HSA provider fees don’t tell the whole story
In Canada HSAs are not closely regulated, opening the door to significant plan structure and fee differences between HSA providers who at their core offer the exact same health benefit product. Nor do the hidden and not-so-hidden costs of HSAs in Canada end with the four above; some HSA providers also charge plan and employee setup and change fees, and transactions fees to employees. Others knowingly or unknowingly create tax liabilities by not collecting and remitting required Ontario HSA taxes, or risk that your HSA plan is deemed ineligible altogether by not structuring it correctly or by not ensuring employer HSA eligibility. As with most other services your business pays for, buyer beware.