Traditional Employee Health Benefits Plans vs. Health Spending Accounts

The world of employee benefits can seem overwhelming, confusing, and daunting, especially if you are a small business owner. We’re here to help you understand two kinds of employee health benefits: traditional benefits plans and health spending accounts.

Once you finish reading this article you’ll have all the information to decide which plan type is best suited for your employees and your budget.

Traditional Benefits Plans

You probably have already heard of traditional employee group benefits plans. These are common in mid-large businesses (but growing in popularity with small business) and include a variety of benefits like Life Insurance coverage, AD&D, Long-Term Disability and Paramedicals (massage, physiotherapy, etc).

Learn more: Employee Health Benefits Coverage Types Explained in 5-Minutes for more details.

Although traditional plans are more expensive than health spending accounts, they offer more coverage and offset some larger health expenses that your employees would not be able to afford otherwise. Plus, there are tax advantages for employers too.

Here is how the process works for traditional benefits plans:

Step One: Find an Advisor

Advisors help design the perfect plan for you, get pricing, and negotiate rates with insurance carriers. The good news: you don’t pay advisors directly. They earn a commission if/when you purchase a benefits plan through them. Think of a realtor, it’s a similar process. 

Fun Fact: If you don’t have an advisor then our team can introduce you to an reputable and knowledgeable benefits specialist.

Step Two: Design a Benefits Plan

With traditional employee benefits plans, you can choose to include: 

1. Life Insurance - a cash benefit paid to the employees’ dependents/families when they die
2. Accidental Death & Dismemberment - usually sold as an add-on to Life Insurance that’s also pays a cash benefit to the employee if they lose their sight, hearing, limb, etc. or the employee's beneficiary if death is due to an accident.
3. Dependent Life Insurance - cash benefit paid to the employee if a spouse or child dies.
4. Extended Health Benefits provides coverage for:
   • Prescription Drugs - drugs prescribed by a doctor
   • Paramedicals - massage, physiotherapy, psychologist, etc. 
   • Major Health - ambulance services, health equipment, private duty nursing, etc.
   • Vision - eye exams, glasses, contact lenses, etc.
   • Out of Country - unexpected medical services and treatments while traveling.
5. Dental - provides coverage for dental cleaning, root canals, crowns, etc.
6. Short-Term Disability - salary coverage if employee is absent from work due to a illnesses/injuries, etc. that prevents them from working for the short-term. 
7. Long-Term Disability - salary coverage if employee is absent from work due to major illnesses/injuries, etc. that prevents them from working for the long-term. 
8. Critical Illness - provides a payout to the employee upon the diagnoses of a covered medical condition. Employees can use these cash payout to cover any travel costs, alterations to their home to assist with mobility or other medical expenses.

Learn more: Employee Health Benefits Coverage Types Explained in 5-Minutes for more details.

Pricing for traditional benefits plans is based on many factors including: age, demographics, etc, and also varies depending on the benefits included. Some benefits are more affordable, like Life Insurance, and some are more expensive, like Extended Health Care.

Step Three: Enroll and Onboard Employees

By this step, you and your advisor would have decided on a plan design and pricing, and signed the dotted line. Now, your employees can begin enrolling and using their benefits. In most cases with traditional plans, you’ll pay a set monthly premium (fee), no matter how many claims (receipts/reimbursement requests) are submitted by your employees.

Fun Fact: At Simply Benefits we have made onboarding, enrolling, managing, and using benefits 100% digital from start to finish. 

To tie everything together, let’s look at the pros and cons of traditional benefits plans. 

Pros:

• A set monthly premium, you will always know what you’re going to pay that month.
• Traditional plans cover large expenses for employees like life insurance, disability, critical illness, etc.
• You can implement cost containment strategies with the plan design to lower your monthly premium. For example: include a co-pay which means the plan will cover some of the expenses while the employee shares the portion not covered. 
• Higher maximums for each line of benefit, so employees can claim more expenses.
• A more diverse range of benefits covered.

Cons:

• Costs are significantly higher compared to health spending accounts.
• They require more administration by employers to manage. [Fun Fact: Simply Benefits digital benefits platform makes it easy for employers to administer their plan.
• They can be complicated to understand and take up more time to set up.
• There is not as much flexibility with traditional plans compared to health spending accounts. But, modular flex plans do offer additional flexibility.

Health Spending Accounts

Health Spending Accounts (HSA) have been increasingly popular in recent years for their flexibility in comparison to traditional benefit plans. They’re a great, tax-free benefit for small businesses to offer their employees, without breaking the bank. Also read: Health Spending Accounts for Canadian Explained.

Health Spending Accounts act differently than traditional benefits plans because they have a set annual maximum dollar amount set by the employer that employees can use. Employers only pay for what their employees claim so if an employee doesn't use their entire spending account budget, the employer doesn't pay.

All claims are reimbursed at 100%, so employees don’t have to pay partial amounts of their expenses. 

Here’s how the process works for health spending accounts:

Step One: Find an Advisor

This step is basically the same for Health Spending Accounts. Your advisor will connect you with an awesome carrier that offers flexible Health Spending Accounts. 

You should consider carriers that provide digital benefits management because it makes monitoring health spending accounts far easier for your employees. 

Fun Fact: Simply Benefits' 100% digital platform allows employees to manage their benefits digitally so employees can easily and quickly check their health spending account usage anytime and submit claims via their desktop computer or via our mobile app.

Step Two: Decide on a Yearly Budget Amount

With Health Spending Accounts (also read: Health Spending Accounts for Canadians Explained), you will have to decide on an annual dollar amount that each employee will receive. For example, $1,000 for the entire year. 

The amount you choose will be a good reflection on the maximum that you might spend on benefits, but you only end up paying for what your employees use each month. So, if an employee has a budget of $1,000 to spend per year but only ends up using $500 then you will only pay $500 for that employee, plus, it’s tax-free. 

Depending on the size of your business, your advisor will help you decide what amount is best for your employees and budget. 

When it comes to coverage, it’s important to note that health spending accounts do not cover benefits like Short-Term, Long-Term Disability, or Life Insurance. However, they do cover many extended health benefits. 

The complete list of accepted services for health spending accounts is defined by the Canada Revenue Agency, and it changes from time to time. Here are some standard services that are covered:

• Prescription Drugs
• Massage Therapy
• Chiropractor
• Hearing Aids
• Glasses and Eye Exams 
• Physiotherapy
• Dental Services (check ups, cleanings)

The great thing about Health Spending Accounts is that employees can claim 100% of the cost of these services, even big ticket expenses, until they reach their yearly maximum.

Employees also have the freedom to pick how they want to spend their budget on medical services that are important to them while also being completely covered. 

Step Three: Enroll and Onboard

At this point, it’s time to onboard your employees. This process usually looks similar to traditional health plans but you'll need to decide on a provider that administers HSAs which may include: a traditional insurer (most insurers offer HSA products), TPAs and TPPs (including Simply Benefits) or vendors that administer health spending accounts exclusively.

The only difference is that now, you’ll only pay for what your employees use. You won’t have to worry about monthly premiums or taxes! 

Now, let’s look at the pros and cons of Health Spending Accounts.

Pros:

• Tax-free and cost-effective especially for small businesses.
• 100% coverage for employees instead of coinsurance.
• Flexibility for employees to pick and choose how they want to spend their budget
• Easy for employers to manage and set up.

Cons: 

• You won’t know 100% what you’ll be paying every month for benefits, it will vary depending on what your employees use. However, to avoid any surprises, it's best to budget the maximum budget for each of your employees.
• Employees will miss out on some other important coverage for benefits like Life or Disability Insurance.
• Employees can only use the amount that is in the account (there is a limit).

Final Thoughts

Employee health benefits should fit your business, not the other way around. 

While traditional benefits plans may be the best option for some businesses, Health Spending Accounts serve as a cost-effective option for businesses that can’t afford traditional plans, or just want more flexibility. 

Hopefully, you now have a better understanding of what benefits will best suit your business. If you have any more questions, reach out to us.

Additional Employer Resources

If you're an employer looking for more information about employee health benefits, contact  your advisor or check out these resources:

• Changes to the 2022 Maximum Insurable Earnings for Canadian Employment Insurance
• How Employee Group Life Insurance Works
• A Guide to Taxable Benefits in Canada

About Simply Benefits

Simply Benefits is Canada's newest Third Party Payor (TPP) that provides Employee Health Benefits 100% digitally through our Canadian Advisor partners. Our all-in-one digital solution provides three portals that enable Benefits Advisors to digitally manage all client plans online, Employers to efficiently administer employee coverage, and Employees to view, update and use their benefits 24/7 via desktop or smartphone app.

We help ENGAGE Employees Anytime, Anywhere, SIMPLIFY the Benefits Experience, and EVOLVE an Advisors’ Benefits Business.

Connect with us at simplybenefits.ca or on LinkedIn, Twitter, Facebook, Instagram, and YouTube.

Employee Benefits Made Simple.