Health Spending Accounts

A cost-effective way for businesses to pay for health and dental expenses for employees and business owners alike.

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What is a Health Spending Account?

A Health Spending Account (HSA), also known as a Private Health Services Plan (PHSP), offers a tax-efficient solution for incorporated business owners across Canada to manage health and dental expenses. This innovative program benefits both employees and business owners, allowing them to allocate funds for medical needs in a tax-efficient manner.

An HSA can complement your existing health insurance plan by covering costs that are not fully reimbursed. It serves as a versatile tool, either enhancing your current insurance coverage or operating as an independent health care funding solution.

The true strength of an HSA lies in its flexibility and tax benefits. It enables the payment of eligible medical, dental, and vision care expenses not covered by standard health insurance plans. Moreover, these expenses are treated as business expenses for your corporation, offering significant tax advantages. This feature not only provides financial relief but also encourages a proactive approach to healthcare management.

Tax Efficient Benefits

HSAs provide significant tax savings for both employers and employees.

Enhanced Flexibility

HSA's cover a wide range of medical expenses, offering greater flexibility than traditional insurance.

Easy Online Management

Modern HSAs are user-friendly with minimal paperwork, easing management for businesses.

Workforce Appeal

Offering HSAs can boost employee satisfaction and loyalty, aiding in workforce retention.

HSA 101

How Does a Health Spending Account Work?

A Health Spending Account (HSA) transforms personal health and dental costs into legitimate business expenses through a simple three-step process:

Incurring the Expense

The process begins when you, the business owner, or an employee incurs a health or dental expense. This could range from a routine dental check-up to a more significant medical procedure. Generally, this expense is paid for using a personal credit card.

Submitting and Processing the Claim

The individual who incurred the expense submits the claim electronically to the HSA provider along with copies of their receipts. The provider then reviews the claim for compliance with Canada Revenue Agency (CRA) guidelines, ensuring it meets the necessary criteria. During this step, the provider requests the necessary funds from the business/employer to cover the amount of the claim.

Receiving Tax-Free Funds

Once the claim is approved, the HSA provider deposits the funds into the claimant’s personal bank account, tax-free. These disbursements are made using pre-tax corporate dollars and are deductible as a business expense, offering a fiscal advantage to the business and a tax-free benefit to the employee.

A diagram depicting the process of using a Health Spending Account (HSA).

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HSA Candidates

Ideal Candidates for a Health Spending Account

For the Self-Employed: An HSA is perfect for self-employed individuals seeking to provide health benefits for themselves and/or their employees, ensuring comprehensive health coverage.
Tax-Savvy Businesses: Businesses aiming to manage health and dental expenses in a tax-efficient manner will find HSAs particularly beneficial, as they offer significant tax advantages.
Health-Conscious Employers: If your goal is to maintain the health and productivity of your family and/or employees, an HSA is an excellent tool, supporting a healthy workforce.
Flexible Benefits for Employees: Businesses looking to offer health and dental benefits that are flexible and tailored to individual employee needs will find HSAs to be an adaptable solution.
Small Businesses Seeking Benefits Solutions: For small businesses that may not qualify for or need a traditional group benefits plan, HSAs provide a cost-effective alternative to offer health benefits to employees.

Eligible Expenses Covered by a Health Spending Account (HSA)

Health Spending Accounts (HSAs) offer comprehensive coverage for a variety of health and dental expenses, ensuring you and your employees have access to a wide range of medical services and support. Covered expenses include:

Prescription Medications: Covering the cost of prescribed drugs essential for health and well-being.
Dental Treatments: From routine check-ups to more complex dental procedures.
Paramedical & Wellness Services: Including treatments from chiropractors, physiotherapists, and other wellness practitioners.
Vision Care: Expenses related to eye exams, prescription glasses, and contact lenses.
Family Care: Covering health needs for the entire family, including pediatric and elder care.
Maternity Health: Supporting health needs during pregnancy and postnatal care.
Hospital & Medical Services: Expenses incurred for hospital stays and medical procedures.
Emergency Travel Medical: Providing coverage for medical emergencies while traveling.
Medical Equipment, Devices, and Supplies: Including necessary medical aids and equipment.
Private Health Insurance Premiums: Covering the cost of premiums for private health insurance plans.

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Frequently asked questions

Answers to key questions about Health Spending Accounts (HSA's)

What is the spending limit for an HSA?

Spending limits in the HSA is set by the employer, ranging from a minimum of $500 to a maximum of $15,000 per employee. Limits vary based on job classifications, with each group getting a different limit. While there's no strict rule, it's important to keep these limits fair and reasonable. A good practice is to have a maximum difference of 10 times between the highest and lowest limits among employees and employers (i.e. 10:1).

Does it mean I'm paying for medical expenses two times?

In a way, yes - however it is temporary.

First, you pay for the medical expense personally out of your pocket.
Then, your corporation pays the same amount to your health spending account provider to process the claim for this expense.
Once the claim is processed, your health spending account provider then reimburses you (personally) fully.

So, while it seems like you pay twice, your corporation benefits from a tax deduction and you are reimbursed (personally) tax-free.

Can I get an HSA?

Yes, you can get an HSA if you:

Run an active business that's incorporated.
Have healthcare costs.
Earn some income reported on a T4 slip.

How much should I allocate for each employee's HSA?

As a business owner, the amount you offer your employees is your choice. A common starting point is about $1,000 for each employee at the basic level. Remember, there's no one-size-fits-all amount. You can adjust the budget to suit your plan. After a year, you can review and adjust for future allocations. Best practice is to start small - as it is always easier to offer employees more benefits than it is to take benefits away.

Is it necessary to include all employees in the HSA?

It's not mandatory to include every employee, but fairness is key. The plan shouldn't just cover shareholders, as this goes against Canada Revenue Agency (CRA) rules for HSAs. It might look more like a benefit for shareholders rather than for employees. So, it's advisable to include at least a portion of your non-shareholder employees to comply with these guidelines.