The Emergence of Spending Accounts for Employees
It is hard to believe that flexible benefits plans have been around for over 30 years but they have not increased significantly in prevalence.  How could that be when employees have consistently indicated that they are looking for more choice and flexibility in their employee benefits plans?  As well, this trend is hard to understand given that employers have also been looking to derive more value from their employee benefits plans in order to better attract and retain high quality employees.

Based on our experience at ZLC Financial, there is likely a very good reason for this – flexible benefits plans generally increase costs (sometimes significantly), both in terms of claims costs and the time and resources required around the administration and communication of these types of plans.  However, based on data from the Conference Board of Canada’s Benefits Benchmarking 2019 report, there is an increasing trend of providing choice and flexibility to employees in a significantly simpler way.  More plan sponsors are addressing their employees’ needs by providing Health Care Spending Accounts (“HCSAs”) and Taxable Spending Accounts (“TSAs”).

HCSAs provide annual dollar credits to employees that can be used to reimburse a number of different benefits expenses not covered under a traditional plan. They are relatively simple to administer and communicate to employees, and the costs under these types of plans are essentially fixed (not subject to typical benefits plan inflation) until the plan sponsor decides to increase the available credits.  These plans can be structured so that any credits not used by employees expire or the plan can be designed to allow for the carry-forward of unused credits for one additional year.  While not quite yet offered by the majority of benefits plan sponsors, HCSAs have definitely increased in prevalence over the past couple of years.

Close to 40 per cent of organizations offer some type of TSA (aka, Wellness, Fitness or Lifestyle accounts).  TSAs provide annual dollar credits to employees that can be used to reimburse a broad range of expenses not covered under a traditional employee benefits plan.  Typically, eligible expenses under these plans are defined by the plan sponsor and usually include health and wellness items, but may also include “green” or “community” initiatives. The range of possibilities is really unlimited and can be customized to meet the needs of the plan sponsor.

Innovative plan sponsors could also look to provide a combination of a HCSA and TSA, or what we like to refer to as a Hybrid Spending Account.  Again employees would be provided with an annual dollar credit allocation but they would be able to decide how much of this allocation would go into each of the HCSA or TSA.  By combining the non-taxable (HCSA) and taxable (TSA) spending account programs, the total impact increases significantly as the employee sees a larger total credit available to them.  Employees also have the ability to ensure that the plans are reimbursing what is personally most important to them at that point in time, and these allocations can change from year to year their individual needs change.

COVID-19 has now added a new element to the idea of Taxable Spending Accounts.  We are seeing an increasing number of plan sponsors interested in providing some level of financial relief to employees to help them with unexpected expenses as a result of the Coronavirus global pandemic.  As noted above, plan sponsors have the flexibility to set the amount of money available and the types of expenses available for reimbursement.  Beyond eligibility for fitness and wellness expenses, plan sponsors could look at things like tutoring, home office equipment, cell phone bills, etc.  Employees can also help design these plans by providing input on what types of expenses they are struggling with so far during the pandemic (e.g., child care).

Traditional employee benefits plans still remain the most common in the Canadian market (approximately 70 percent of plans), but more and more plan sponsors are providing the choice and flexibility that their employees are looking for by way of spending accounts.  HCSAs can provide reimbursement for items not covered under the traditional benefits plan or provide additional coverage when employees hit plan maximums.  TSAs can provide reimbursement for a broad range of items that the plan sponsors deem eligible and that employees value even though they generate taxable benefits.  Regardless of which plan is utilized or whether both are provided, these spending accounts help provide the desired choice and flexibility that employees are looking for without adding undue administration and communication requirements to the plan sponsor.

We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits and retirement programs.  Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.

ZLC Financial is one of the fastest growing advisors for employee benefits programs in Vancouver and we are fortunate to have the best people, resources and clients. We provide value to you by leveraging one of the most skilled benefits teams – almost 350 years of experience within our team of 18 employee benefits specialists.  We have been working with businesses ranging from 3 to over 70,000 plan members for the past 35 years.

Written By Dan Eisner,
Employee Benefits Advisor

This information is designed to educate and inform you of strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a qualified advisor.

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