Guide to Health Spending Accounts (HSA) for Startup Businesses in Canada

Introduction

Starting a business is an exciting journey filled with numerous decisions, one of which is how to provide healthcare benefits to your employees, as well has how to attract and retain those employees. Health Spending Accounts (HSAs) offer a flexible and tax-efficient way to manage healthcare costs for your startup. This guide will walk you through everything you need to know about HSAs in Canada, tailored specifically for startups.

What is a Health Spending Account (HSA)?

A Health Spending Account is a type of employee benefit plan that allows employees to be reimbursed for eligible healthcare expenses with pre-tax dollars. HSAs are particularly attractive for startups because they offer flexibility and cost control while providing a valuable benefit to employees.

Key Benefits of HSAs for Startups

1. Tax Efficiency: Contributions to HSAs are tax-deductible for the business and tax-free for employees. In other words, HSA benefits are a legitimate business expense, and are not taxable as income for employees.
2. Cost Control: Unlike traditional employee group benefit insurance plans which renew each year at potentially higher premiums, HSAs allow you to set a budget for each employee. This helps in managing costs, ensuring predictability year over year, which especially important for startups with limited financial resources.
3. Flexibility: Employees can use HSA funds for a wide range of healthcare expenses, including dental care, prescription medications, vision care, and paramedical services(e.g. massage, physiotherapy etc.). This flexibility makes HSAs attractive to a workforce with diverse healthcare needs.
4. Employee Satisfaction: Offering an HSA can improve employee satisfaction and retention by providing a customizable health benefit that meets their individual needs.

How Does an HSA Work?

1. Funding the HSA: As an employer, you allocate a specific amount of money to each employee’s HSA annually. This amount is typically determined based on your budget and the needs of your employees.
2. Eligible Expenses: Employees can use the funds to pay for eligible medical expenses not covered by provincial healthcare plans. These expenses are defined by the Canada Revenue Agency (CRA) and include a broad range of healthcare services.
3. Reimbursement Process: Employees pay for healthcare expenses out-of-pocket and then submit receipts to the HSA administrator for reimbursement. The reimbursement is tax-free, and generally processed within 1-3 business days providing immediate financial relief for employees.
4. Unused Funds: Depending on the plan design, unused funds at the end of the year may roll over to the next year or be forfeited. It’s important to choose a plan structure that aligns with your business goals and employee preferences.

Setting Up an HSA for Your Startup

1. Choose a Provider: Select an HSA provider that offers a plan suited to your startup’s needs. Consider factors such as administrative fees, ease of use, and the range of services covered.
2. Determine Employee Classes: Define the groups of employees within your startup. Your HSA can be configured such that each employee class receives a different dollar limit. If your startup is relatively small or the hierarchy is relatively flat, you may prefer to offer everyone the same dollar limit. For a more in-depth look at employee classes and dollar limits, read this article. E.g. Employee classes could include:
   1. Executive
   2. Management
   3. Full-time staff
   4. Part-time staff‍
3. Determine Contribution Levels: Decide how much your startup can contribute to each employee’s HSA. This amount should be sustainable for your business while providing meaningful benefits to employees.
4. ‍Communicate with Employees: Clearly explain how the HSA works, including eligible expenses, reimbursement procedures, and any deadlines for submitting claims. Providing a detailed guide or holding informational sessions can help employees understand and utilize their HSAs effectively.
5. ‍Monitor and Adjust: Regularly review the usage and effectiveness of the HSA. Gather feedback from employees and adjust the plan as needed to ensure it continues to meet their needs and your business objectives.

Optional Insurance Add-Ons

Some HSA administrators also offer optional insurance add-ons for a fixed rate per employee that can enhance the coverage provided by your HSA. These add-ons are designed to cover unplanned expenses and can include:

1. Life Insurance: Provides financial protection to an employee's beneficiaries in the event of the employee's death, or that of their spouse, or dependent children.
2. Accidental Death & Dismemberment: Offers compensation in case of accidental death or loss of limbs, sight, or hearing.
3. Critical Illness: Pays a lump sum if an employee is diagnosed with a specified critical illness, such as cancer, heart attack, or stroke.
4. Travel Emergency Medical: Covers medical expenses incurred while traveling outside of Canada.
5. Excess Medical Costs: Provides coverage for medical expenses that exceed a certain dollar threshold. E.g. If an employee is diagnosed with a condition that requires a costly prescription medication, the insurance coverage will respond to assume these costs and help pay for the cost of the medication.

By including these optional insurance add-ons, an employer can create a comprehensive, yet cost-effective benefits plan. This enhanced benefits package can be a powerful tool for attracting and retaining talent, as it provides employees with peace of mind and financial security against unexpected high-cost health expenses and events.

Common Questions About HSAs

1. What expenses are eligible for reimbursement? Eligible expenses are outlined by CRA, and typically include prescription medications, dental care, vision care, paramedical expenses, and certain medical devices. See this article for a more comprehensive list of eligible expenses.
2. ‍Can employees use HSA funds for dependents? Yes, employees can use HSA funds to cover eligible expenses for their spouse and dependents, making it a versatile benefit for employees with families.
3. ‍When is it appropriate to consider a ‘traditional’ employee group benefits plan? As your startup business grows, it may become appropriate to consider a more traditional employee group benefits plan to offer enhanced compensation and attract and retain talent. Traditional plans offer the ability to more fully customize your benefits offering. For a more in-depth look at Health Spending Accounts (HSA's) versus Traditional Employee Group Benefits, have a look at this article.
4. How long does it take to set up an HSA? Your Health Spending Account can be set up within 1-3 business days.

Conclusion

Health Spending Accounts offer a flexible, cost-effective way for startups to provide healthcare benefits. By understanding how HSAs work and carefully implementing a plan, your startup can attract and retain top talent while managing healthcare costs efficiently.

Consider setting up an HSA and exploring optional insurance add-ons to give your employees the healthcare benefits they deserve and to support your startup’s growth and success.

Advisors at Garrett Agencies can assist in setting up a Health Spending Account for your startup business in Canada, ensuring a smooth and efficient process.