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Notional Credit & Allowance Based HCSA

Notional-Credit-and-Allowance-Based-HCSA There are many types of health care spending accounts (HCSAs) and hybrid designs for employee benefit plans. The most common types are notional credit and allowance based HCSAs. Notional credit and allowance based HCSAs offered by insurance companies are incorporated into a traditional flexible type benefit plans. HCSAs were created with the introduction of Canada Revenue Agency (CRA) Bulletin IT-529 called “Flexible Employee Benefit Programs”. Eligible expenses are outlined in bulletin IT-529R2 called “Medical Expenses and Disability Tax Credits and Attendant Care Expense Deductions.” This bulletin serves as the main guideline of eligible expenses that employees can claim as medical tax credits and what is deemed to be considered an acceptable medical expense for an HSCA in Canada.

The workings of this plan:

Employer pays a premium to the insurer for a pre-defined amount of coverage in bulk or into reserve to fund future expenditures. In this arrangement the employee can deposit any leftover funds or credits from their group benefit plan also called a flex plan into an HCSA. The amount is determined by the employee after selecting their core coverage from their benefit options. Any funds deposited expire after 24 month if not used they are forfeited. The amounts of unused funds forfeited by the employees can result in two possible scenarios depending on the set up of the plan.

    1. If the plan is a notional credit model funds may be returned to the employer as a credit to their HCSA account.

    2. If the plan is allowance-based the amount is simply included as the overall premium charged by the insurer and the unused amount is considered unpaid claims by the insurer.

The rules for contributions, fund rollovers and deductions are as follows:

    1. In order to qualify for a health care spending account (HCSA) the plan need to satisfy Canada Revenue Agency (CRA) requirements. To retain its non-taxable status an HCSA must contain an element of risk. It is for this reason that unused balanced can only be carried over for 12 month and be used within a 24 month period.

    2. Canada Revenue Agency (CRA) allows HCSA allocations (referred to as “credits”) to be carried forward 12 month following the year they were granted by the employer. After a 24 month period if not used they are forfeited. The employer can establish a carry-forward provision subject for the forfeiture rules. Canada Revenue Agency (CRA) does not allow for credits to be cashed out at any time.

    3. Roll overs of unclaimed expenses are subject to the same carry-forward rules and provisions they are valid for 24 month.

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