Beginners Guide to Health Spending Accounts in Canada – For Employers (2024)

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 arms-length employees. If you do not have arms-length employees click here to view a similar guide for a self-employed and incorporated individual.

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 $220 (i.e. $200 + a *10% HSA admin 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 the top-marginal tax rate (48%), it means that in order for the employee to have $200 (after-tax) in their pocket that they can spend at the dentist, they must first earn $384.61 before-tax.

Put another way; if the employee earns $384.61 of income, they are left with $200 after paying the income tax.

So, when the employee pays $200 personally at the dentist, it is in fact costing that employee $384.61 before-tax 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) will only be $220.

This means an immediate savings of $164.61 (i.e. $384.61 - $220 = $164.61) on the employee’s $200 dental expense, or about 43% in percentage terms.

It is the same $200 dental expense, but paid for in two very different ways, the result being that one way (using an HSA) is substantially less expensive than the alternative (paying out-of-pocket personally).

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 complimentary.

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 $44 (i.e. $40 + a 10% 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.

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). The Canada Revenue Agency (CRA) provides a comprehensive list of eligible expenses for HSAs.

Learn more about eligible expenses

A high-quality and reputable HSA provider will perform regular auditing on claims to ensure that any expenses submitted are compliant with the 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 employees of an incorporated business.

The basic criteria as set out by CRA are as follows:

1. An incorporated business
2. Recipients of HSA benefits are paid T4 employment income

How Much Can an Employee Claim Per Year?

CRA guidelines suggest contribution limits must be “reasonable”, but it is left open to interpretation as to what reasonable means.

As of this writing, the HSA industry in Canada generally has converged on $15,000 per year as being a reasonable upper limit per employee. This amount is pooled for the employee’s family, meaning that any one family member could claim the fully amount if needed/desired. “Family” includes the employee’s nuclear family, meaning the employee, their spouse (if any), and dependent children (if any).

‍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. This approach aligns with the CRA's criteria for "consistency" and "reasonable" contribution limits.

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

To avoid the perception of favoritism towards higher-level employees—and to prevent HSAs from being classified as taxable shareholder benefits—it is recommended that the highest limit not exceed ten times the lowest. Therefore, if executives are allocated $15,000, the minimum limit for any class should be at least $1,500.

‍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.