We want to talk about the 10% rule and why it is confusing and made things worse - not better.
A few years ago, CRA made an update to HSAs and what can be claimed. The update said:
A self-insured plan meets the “all or substantially all” (generally 90% or more) requirement for a calendar year if all or substantially all of the benefits paid to all employees that year are for medical expenses that are eligible for the METC.
At least 90% of all expenses put through the HSA must appear on the METC, 10% doesn’t have to. It is important to note though, that you cannot just take 10% of your HSA balance and spend it as you see fit. It must be a calculation of 10% of eligible claim costs. I think the purpose of this update was really to offer the CRA wiggle room in auditing, due to the volume of expenses that they were seeing that were not explicitly mentioned on the METC (Medical Expense Tax Credit). Many of those ineligible items are likely related to eligible expenses, but this “grey” area is a bit tricky to adjudicate when employees don’t understand what is or isn’t covered.
To demonstrate this, here is an example we see often:
You see a Naturopath (service fee is eligible) and they prescribe a regimen of vitamins (not eligible); however, the cost of the vitamins, or at least a portion, can be covered under the 10% rule. The total cost of the visit was $200 - $100 for the visit, and $100 in vitamins, but only $10 can be applied to the vitamins – for the sake of the example, we’ll assume this was the only expense incurred this year, therefore the 10% is only based on $100 of eligible expenses put through the HSA.
The challenge is: this is hard to administer, police, and educate employees. The average person does not know what allowable HSA expenses are to begin with, so the employee does not see the difference between the Naturopath service and the vitamins. Policing this is hard, as you need to keep an ongoing balance of eligible claims so you can have a running 10% balance of ineligible items for when they come in. These ineligible items can change based on claiming patterns, so it is a moving target.
As a tech company, we can solve this problem easily enough, but the most important aspect is educating the employee. It is very difficult to communicate that the rule’s application is directly related to the running total of eligible expenses processed, not the item itself.
In my opinion, keeping an eligible item list in black and white makes sense. CRA allows X, Y, and Z expenses; it is not allowable if it is not on their list. This makes it much easier to properly run the plans as per CRA’s outline. I would argue it is easier for employees to understand their plans. Adding a buffer in theory sounds pretty good, but it makes it more challenging for everyone.
We want to play by the rules while balancing the employees’ needs. We’ve come to the question "Why can we not operate it how we see fit?" We still stay in line with CRA’s rules but can streamline it for all users, internally and externally. I think it also aligns with employers' "intent” in offering an HSA.
We will not advertise the 10% rule to the employees. We will, however, track the 10% running credit that can be applied when the adjudicator sees fit on the back end. The 10% rule will only be applied when there is an alignment of the intention for the therapy for the employee. In cases, for example, where the naturopath is providing a therapy or item to aid in the scope of their profession and is included on the same invoice as their service, we can apply the 10% rule. When applied, we will educate the user clearly on what is eligible vs not eligible and why we applied the 10% rule.
Steve McEwan
COO & Co-Founder
myHSA