A Complete Guide to Health Spending Accounts
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Discover the methodologyAre you a small business owner in Canada looking for a viable and cost-effective alternative to obtain health insurance for your employees? A health spending account (HSA) may be an option for your business.
Instead of paying premiums and deductibles to get coverage, you can save more money by removing the income tax from your employees’ medical expenses by paying through your business with a healthcare savings account.
Read through our guide to understand more of what an HSA is, how it works, and tax benefits that may be available to you and your employees by utilizing a health savings account.
What is a health spending account?
A health spending account, or HSA, is an alternative to traditional health insurance. An HSA acts as a self-insured health plan arranged by employers for their employees residing in Canada. They are an important part of group benefits. They provide a way for small businesses to provide tax-free health and dental benefits to their employees and their dependents.
An HSA enables a small business to deduct 100% of their family health and dental expenses without paying standard premiums typically associated with traditional and provincial health insurance plans.
Do you think that an HSA could be right for you and your business? Want to speak to an expert? We can help you compare plans and pick a provider.
How do HSAs work in Canada?
A health savings account allows Canadian employees to put money aside pre-tax to be used throughout the year on qualified health care expenses. Healthcare savings plans are a good option for people who are enrolled in a high deductible health care plan as it allows them to pay for their medical expenses more easily. Health spending accounts were developed to help reduce the cost of health care both for companies and for individuals.
Good to know
The ability to write-off health and dental expenses can create substantial savings on medical and dental-related expenses, making it an effective tool to cut your taxes and reduce your medical costs.
How can I offer an HSA to my employees?
If you are wanting to offer HSA plans to your employees, you will want to begin by deciding on a yearly budget amount. The amount you choose should fairly reflect the maximum that you may spend on medical expenses that year. Keep in mind that you will only end up paying for what your employees use each month. If you have an employee that has a budget of $1,000 to spend per year but only ends up using $500 then you will only pay $500 for that employee. Always remember, it is tax-free.
Once you have a budget, you can begin enrolling and onboarding your employees. This process is similar to traditional health plans but you will need to decide on a provider that administers HSAs which can sometimes be a traditional insurer.
What expenses can be claimed on an HSA?
The HSA is available for unpaid balances or expenses not covered under other benefit plans. In Canada, examples of eligible medical expenses that can be claimed under my HSA per the Income Tax Act are:
- Vision care expenses
- Prescription drug expenses
- Paramedical practitioners (psychologists, optometrists, acupuncturists)
- Adult orthodontics
What cannot be claimed under a HSA?
While your employees can claim a variety of medical expenses by using their HSA, certain expenses cannot be claimed per the Income Tax Act. Examples of ineligible expenses include:
- Services of non-qualified medical practitioners
- Premiums to public health service plans
- Supplements
- Ear Plugs -Allervac vacuum cleaner for allergies
- Exercise balls
- Hot tubs
- Counsellors
Who can open an HSA account in Canada?
As far as who can qualify for an HSA in Canada, the employee and dependents as defined in the Income Tax Act of Canada are eligible.
Incorporated businesses, including shareholder-employees and all other corporate employees, are eligible to participate in an HSA. Corporations with as few as one employee can be eligible to open an HSA as well.
In the case of unincorporated businesses or sole proprietors, the owner of the business and their employees are also eligible if the owner has at least one arm's-length employee.
What are the benefits of offering my employees an HSA account in Canada?
If you are a business owner with one or more employees, there are several benefits to offering your employees an HSA account. A health spending account is an inexpensive way for employers and sole proprietors to offer tax-free health benefits to employees, their dependents and themselves.
A health savings account helps to provide health benefits that are 100% deductible to employers and 100% tax-free to employees. An HSA plan is simple to set up, has no monthly premiums and provides significant savings compared to traditional health insurance plans.
Remember you only have to pay for what your employees use.
What are arm’s length employees?
In the terms of an HSA and how it relates to small businesses, workers are usually referred to as arm’s-length employees unless they are an owner or an owner’s family member.
A reasonable timing or duration your employee works for you may also suggest an arm's length relationship.
An unreasonable timing or duration of employment may suggest that an employee and the employer or business owner are not dealing with each other at arm's length within their employment relationship.
Health spending account vs traditional health insurance?
Traditional health insurance plans are popular among growing and large corporations but are also gaining popularity among small business owners. Traditional health insurance plans include a variety of benefits like life insurance coverage, accidental death & dismemberment, disability plans, and paramedical coverage.
Although traditional plans are more expensive than health spending accounts, they offer more coverage and offset potential larger, more expensive health expenses that your employees would not be able to afford. Plus, there are tax advantages for employers.
HSA plans have grown increasingly more popular in recent years due to their flexibility in comparison to traditional benefit plans. They have a tax-free benefit for small businesses to offer their employees, without breaking the bank.
Good to know
HSA plans differ from traditional health insurance plans because they have a set annual maximum dollar amount set by the employer that employees can use. As an employer, you will only pay for what your employees claim so if an employee does not use their entire spending account budget, you would not have to pay.
Are HSA distributions taxable?
In Canada, HSA distributions are exempt from taxes if all of the funds are used to pay qualified medical expenses that were incurred after the HSA was established.
An HSA becomes a taxable account with the downside of potential penalties and tax reporting complications. You and your employees should use the HSA for Canadian medical expenses rather than your taxable investment account.
A tip for picking the right service provider:
Trying to find the right health savings account provider may seem overwhelming as there are many providers on the market. One important tip to finding the right provider would be to talk to an advisor to help you find the right plan. An advisor can also help you avoid some dishonest businesses practices.
The Canada Revenue Agency (CRA) has recently noticed some businesses claiming false or incorrect deductions related to Health Spending Accounts (HSA). For example, claiming they were collecting for prescription medications, but the HSA funds were used toward over-the-counter medications. The CRA wants to make sure members are aware so they do not try to commit this offence. Tax schemes are plans and arrangements that contravene the Income Tax Act and deceive taxpayers by promising to reduce the taxes they owe.
No business owner wants to find themselves with a provider operating in that way. Talking with an advisor will help you find a reputable HSA provider.
