Beginner’s guide to health spending accounts in Canada: for employers

Introduction

As a business leader, navigating the available options for addressing health and dental benefits across your organization can be complex. In Canada, Health Spending Accounts (HSAs) offer a scalable and tax-efficient solution for businesses and employees alike.

Health Spending Accounts are applicable to organizations of all sizes, small businesses with a handful of employees to enterprises with thousands of employees.

This guide is designed to introduce you to the basics of HSAs in Canada, helping you understand how they can benefit your organization.

Note: This guide assumes you have arm’s-length employees. If you do not have arm’s-length employees, see the beginner’s guide to health spending accounts for incorporated business owners.

What is a Health Spending Account (HSA)?

An HSA is a type of tax-advantaged account that allows businesses to cover a wide range of health and dental expenses for their employees, making these costs both a legitimate and beneficial business expense. Under an HSA, the business reimburses employees for their health-related expenses through a pre-defined framework.

In 'legal' terms, a Health Spending Account (HSA) is a contract agreement between an employer (a corporation) and an employee. This agreement outlines that the employer will cover the employee's health and dental expenses through reimbursement.

Contributions made to an HSA are treated as a business expense (just as you would treat the cost of things like office supplies, internet, business meals etc.) and for that reason are tax-deductible, reducing your business's taxable income.

Additionally, the funds used for eligible health and dental expenses are received by employees tax-free (meaning they are not taxed as income to the employee).

Why Have a Health Spending Account?

HSAs are not only cost-effective for managing health and dental expenses, but they also contribute to a healthier, more satisfied workforce. These plans can be customized to meet the diverse needs of your employees, enhancing your company’s benefits package and aiding in talent retention.

How Does an HSA Work?

The steps to use an HSA are as follows:

1. Employees incur a health/dental expense and pay personally, typically paying with a personal credit card.
2. They submit a claim securely through a mobile app or a web portal.
3. The employer then reimburses the claim from corporate funds, including any administrative fees the HSA provider charges.
4. The HSA provider processes the claim and reimburses the employee by depositing the processed claim directly to their personal bank account, meanwhile ensuring all transactions comply with CRA guidelines.

Example

Let’s illustrate how a Health Spending Account (HSA) works using an example:

Step 1: Say an employee goes and visits the dentist for a routine teeth cleaning. The visit might cost the employee $200. The employee pays the $200 personally using a personal credit card.

Step 2: The employee submits their $200 expense to the HSA Provider. They can submit the expense conveniently and securely either by taking a photo of the receipt using a mobile app, or online using a secure web portal.

Step 3: Concurrent with submitting their expense, the employer provides funding for the $200 claim plus the HSA provider’s administration fee*. These funds come from the corporate bank account and go to the HSA Provider. These payments can be made easily and conveniently using online banking. Funds can be left on account with the HSA provider (i.e. pre-funded) to ensure employee claims are processed swiftly.

Step 4: The HSA Provider reviews the employee’s expense to ensure it is compliant with CRA guidelines. Assuming that the expense is compliant, the HSA Provider will then deposit (credit) $200 into the employee’s respective personal bank account.

Once this process has completed, the employee has successfully been reimbursed personally (tax-free) and the expense has been paid for corporately (i.e. business expense).

*Note: The admin fee can vary depending on the HSA provider and the volume of employees.

Why is this valuable and how does it save your employees money?

To help illustrate, let’s compare the two ways one might pay for the $200 dental expense. One can either pay personally out-of-pocket or pay using an HSA.

Paying Personally (i.e. no HSA):

Say your business didn’t have an HSA setup and employees simply paid the $200 dental expense out-of-pocket instead.

Whenever anyone pays any expense personally, they are spending after-tax dollars.

Let’s assume the employee lives in Alberta and pays tax at the top marginal rate. In order for the employee to have $200 (after-tax) in their pocket that they can spend at the dentist, they must first earn close to twice that amount before tax.

Put another way, at that rate close to half of every extra dollar the employee earns goes to income tax.

So, when the employee pays $200 personally at the dentist, it is in fact costing that employee close to twice that amount in before-tax income in this illustrative example.

Paying Using an HSA:

By contrast, if your organization offers employees an HSA to pay for the same $200 expense, the net cost to the corporation is only the $200 plus the HSA provider’s administration fee.

To leave the employee with the same $200 through salary, your business would have to pay close to twice that amount in extra salary; through the HSA, it pays the $200 plus the administration fee. Both are deductible business expenses, so the comparison is like for like: the HSA delivers the same $200 dental expense for substantially less.

This immediately saves the employee money on health and dental expenses, and for that reason is a valuable benefit.

What if your organization offers employees Health and Dental insurance benefits already?

A Health Spending Account works well independently of an insurance plan but is also complementary.

Let’s illustrate how a Health Spending Account (HSA) works in conjunction with your employee group benefits insurance plan using an example:

Step 1: Say an employee goes and visits the dentist for a routine teeth cleaning. The visit might cost the employee $200. The dentist’s office submits the expense to the employee’s insurance plan for reimbursement. The insurance company reimburses some percentage (percentage will vary depending on your plan), and the employee pays the balance out-of-pocket. Let’s say the insurance company reimburses 80% of the employee’s $200 dental expense – this leaves the employee with $40 that they must pay out-of-pocket (i.e. the balance of 20%).

Step 2: The employee then submits their $40 expense to the HSA Provider. They can submit the expense conveniently and securely either by taking a photo of the receipt using a mobile app, or online using a secure web portal. If your HSA is set up with the same insurance company as your employee group benefits plan, this is often all managed within the same mobile app and online portal – making for a more seamless experience for the employee.

Step 3: Concurrent with the employee submitting their expense, the employer provides funding for the $40 claim plus the HSA provider’s administration fee. These funds come from the corporate bank account and go to the HSA Provider. These payments can be made easily and conveniently using online banking. Funds can be left on account with the HSA provider (i.e. pre-funded) to ensure employee claims are processed swiftly.

Step 4: The HSA Provider reviews the employee’s expense to ensure it is compliant with CRA guidelines. Assuming that the expense is compliant, the HSA Provider will then deposit (credit) $40 into the employee’s respective personal bank account.

In short, if your organization has an insurance plan and an HSA, the employee will submit the expense to their insurance plan first, and to the HSA second.

Eligible Expenses

HSAs cover a broad spectrum of medical expenses that may not be fully covered by standard health insurance plans. This includes, but is not limited to, prescription drugs, dental services, vision specialists and prescription eyewear, and medical treatments provided by licensed health care practitioners (e.g. physiotherapy & massage). An HSA reimburses expenses that qualify for the medical expense tax credit, and the Canada Revenue Agency (CRA) publishes the list of those eligible medical expenses (opens in a new tab).

Learn more about eligible expenses

Your HSA provider should review claims to check that the expenses submitted comply with CRA guidelines.

While HSA’s provide additional flexibility to the employee in terms of what they may be able to claim and be reimbursed for, as an employer you can add additional restrictions on what types of expenses can be claimed should you choose to.

Who is Eligible for an HSA?

HSAs are available to incorporated businesses, which can offer an HSA to their employees, including shareholder-employees. For a shareholder-employee, the benefit must be received as an employee rather than because they own shares, and it must be reasonable; being paid a salary can help show this. Confirm your situation with your accountant.

For the plan to qualify as a private health services plan, the CRA’s conditions include:

1. It covers only medical and hospital expenses (and expenses connected with them), and all or substantially all of its cost relates to expenses eligible for the medical expense tax credit
2. It covers only the employee, their spouse or common-law partner, and members of their household related to them by blood, marriage or adoption

How Much Can an Employee Claim Per Year?

The Income Tax Act lets a business deduct an expense only to the extent that it is “reasonable in the circumstances”, and the CRA does not publish a dollar limit for HSAs, so what is reasonable depends on the facts.

Your business sets an annual limit for each employee (or each class of employees) when the plan is set up. This amount is pooled for the employee’s family, meaning that any one family member could claim the full amount if needed. “Family” here means the people a private health services plan can cover: the employee, their spouse or common-law partner, and members of their household related to them by blood, marriage or adoption (such as dependent children).

‍Employee Classes

Employers can establish different ‘classes’ of employees within their organization for HSA, ensuring that all members within each class receive the same benefits. Each class’s limit should also be reasonable in the circumstances (see above).

For example, executives might receive a limit of $15,000, senior management $5,000, and full-time employees $1,500.

Where shareholder-employees have a higher limit than other employees, the CRA may look at whether the extra is received because they own shares, which would make it a taxable shareholder benefit. The CRA decides this on the facts of each case, so it helps to base each class on employees’ roles and to review the limits with your accountant.

‍Should I Speak with My Accountant

It is advisable to speak with your accountant to see if a Health Spending Account is appropriate for your organization.

Conclusion & Next Steps

Health Spending Accounts offer a flexible and tax-efficient way to manage healthcare expenses in Canada. If you’re an employer looking to enhance your benefits package, HSAs can provide significant financial advantages, and help foster a healthy and productive workforce.

Contact Garrett Agencies and an advisor will be happy assist you in setting up an HSA for your organization.