Traditional Health Insurance Plan? or Health Spending Account?
I’ve been working with many small business owners, unless they have coverage from their spousal plan, most of them will need to get their own health and dental coverage. Generally speaking, there are 3 ways they could finance their health expenses:
- Pay directly from their own pocket
- Purchase a “Traditional Health Insurance” plan, then claim the expenses
- Setup a “Health Spending Account (HSA)“, and receive reimbursement for the eligible medical expenses
Paying directing from your own savings is very self-explanatory, while there’s really no definite answer as to which option is the absolute better one among the traditional health insurance plan and the health spending account, I will briefly go over the pros and cons of the two.
If you’re a business owner, both the premium of the traditional health insurance plan, and the contribution towards the health spending account may be treated as business deduction. Therefore, there isn’t much difference in this area.
Although most traditional health plans do provide different coverages for you to choose, they are pre-set combo plans. That means they have already set the limit for different items which you could claim. Suppose you wish to allocate most of your spending into the chiropractor service this year, yours claim to the traditional health plan will be limited to their pre-set amounts. On the other hand, you will have total control on how to use your fundings within your health spending account. In fact, there are items that might not be insured under the traditional health plan, but can be covered by the HSA, given that they are defined as eligible medical expenses by the CRA. (To view the list of eligible and non-eligible expenses. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns300-350/330/llwbl-eng.html)
* As for the premium, traditional health insurance will charge according to the coverage you choose and your age. It is subjected to change according to their cost in providing this coverage. Whereas, you may decide exactly how much to contribute into the HSA. Not only that, you may not recoup the unclaimed portion of the traditional health insurance plan. On the other side, unused contribution within the HSA may be carried forwarded to the future years.
(*Note: Health Spending Account, HSA have different rules applied for sole proprietor and corporation for the amount of contribution and carried forward premium)
One of the key differences is that some traditional health plans provide insurance protection should you incur unexpectedly huge amount of health expenses, while health spending account is really a self-insured plan. For example, the Manulife ComboPlus Enchanced Plan provides prescription drugs coverage of up to $10,000 per year. (As of July 16, 2013, and may be subjected to change) If one were to claim this amount, the drug benefits would most likely be more than the premium costs. Whereas for the case with health spending account, you will only get reimbursement of up to the amount you contributed less any expenses deducted.
Since insurance company absorbs the risk of high claims for traditional health plans, they might require insured to go through medical underwriting, especially for the plans that have high limit on their coverage. It is possible that there are exclusions on the covered conditions, (i.e.: Medicines for a pre-existing condition may not be covered), or the application can even be declined. On the other hand, there’s no underwriting involved with setting up a HSA. You may use your HSA fundings even on medicines that are currently being taken.
To conclude, there is no single best option for everyone. It really depends on individual’s situation and preference. For example, one who wants more control in how to spend their contributions may choose the health spending account. Whereas, a business owner with young dependents may be very concerned about the risk of incurring unexpectedly high medical costs, in this case, they may prefer to be insured by the traditional health plan. Of course, it does not have to be one or the other. In fact, some companies are offering both to their employees as part of their group benefits.
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