What is a Health Spending Account & How Does it Work?

Healthcare is expensive worldwide, and these costs only continue to rise. While Canadians receive publicly funded healthcare support, it doesn’t cover all medical costs. This is where finding ways to bridge the gap becomes crucial. One solution that has gained traction in recent years is a Health Spending Account (HSA) 

So, if you’ve ever wondered how to make healthcare more affordable and accessible for your team, an HSA might just be the answer you’ve been looking for.

An HSA offers Canadian employers a straightforward way to provide tax-free health and dental benefits to employees and their families, making it a win-win for all parties involved.

For employers, the advantages are clear: the health benefits provided through an HSA are fully tax-deductible, offering businesses an opportunity to save money while ensuring the well-being of their employees.

Employees, on the other hand, enjoy numerous perks:

• Tax-free benefits for themselves and their families
• They are relieved of the burden of dealing with co-pays or deductibles
• They can submit a variety of medical and dental expenses eligible under the HSA, some of which may not be covered by regular health plans, with claims promptly reimbursed by the insurance company

An HSA is an investment by employers in their workforce. Many employees utilize this benefit to supplement what their standard benefits cover, paying for outstanding amounts, deductibles, or dispensing fees. 

Additionally, an HSA can also cover expenses exceeding the maximum provided by standard benefit plans, such as additional massage therapy sessions after reaching the yearly maximum.

Moreover, an HSA can extend coverage to medical expenses not typically included in provincial or standard insurance plans, including sight and hearing, guide dog expenses, and specialized equipment for persons with disabilities, among others. This flexibility ensures comprehensive coverage for employees’ health and wellness needs.

Why offer a Health Care Spending Account (HCSA)?

Offering an HCSA can provide several benefits for both employers and employees:

For employers:

• Tax advantages: Contributions to HSAs are tax-deductible for employers, reducing the overall tax burden
• Cost control: HSAs can be paired with high-deductible health plans (HDHPs), which often have lower premiums than traditional health plans, potentially reducing the company’s healthcare costs
• Reduced administrative costs: Compared to more complex health benefits plans, HSAs might have lower administrative costs

For employees:

• Tax benefits: Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Earnings on HSA funds also grow tax-free
• Savings for future healthcare costs: HSAs can be a savings tool for future medical expenses, including those in retirement. This can be especially useful for high-deductible plans with higher out-of-pocket costs
• Portability: The account belongs to the employee, so it remains with them if they change jobs

HCSA options

HCSAs in Canada provide a flexible employee benefits solution that can be structured as either a stand-alone option or integrated into a group benefits plan. Below is a detailed overview of both configurations:

Stand-alone HCSA (Private Health Services Plan/PHSP)

A stand-alone HCSA is designed to function independently of traditional health insurance plans. Here are some of the most basic ways in which a stand-alone HCSA functions:

• The employer fully funds the account, determining the amount available for each employee or class of employees. This funding is tax-deductible for the employer, and benefits received by employees are tax-free as long as the account qualifies as a PHSP under CRA guidelines
• Each class of employees receives the same amount of funds, which can be used for a broad range of eligible medical expenses, including dental, vision, and prescription drugs, as defined by the CRA
• Employees can submit claims for eligible expenses directly from their HCSA, which allows for greater flexibility and choice in how they utilize their benefits.
• Employees can decide how to utilize the unused funds at the end of the year, including options for rolling over the unused amounts or forfeiting them to the employer after a specified period

HCSA as part of a group benefits plan

When integrated into a group benefits plan, an HCSA serves as a supplement to existing health and dental coverage. Its characteristics are multifold, some of which may be as follows:

• Employees typically submit claims through their standard group benefits plan first, and any remaining eligible expenses can then be claimed through the HCSA. This structure helps cover out-of-pocket costs that exceed standard coverage limits
• Similar to a stand-alone HCSA, the employer usually funds the HCSA entirely, allowing for tax advantages. However, the specifics of funding may vary depending on the employer’s plan design
• The claims process may be streamlined through the employer’s existing benefits platform, making it easier for employees to manage their health expenses

Take a detailed look at the types of group health plans available in Canada

How does a health spending account work?

A Health Spending Account (HSA) is like a flexible piggy bank for health expenses, benefiting both employers and employees without the hassle of setting up a traditional health insurance plan. Here’s how it works:

Step 1 (Setting up an HSA): Employers decide how much money each employee can use for health expenses annually (this is called coverage limit), for example, $20,000 for Senior Managers, $10,000 for Managers, and $5,000 for others. Then, the employer proceeds to put the money into the HSA.

Step 2 (Paying for health expenses): Employees pay for their health services upfront, whether it’s a doctor’s visit or a massage.

Step 3 (Claiming reimbursement): After paying, employees file a claim with a third-party administrator. The policy administrator checks if the expense fits the rules and is within the limit.

Step 4 (Getting money back): Once approved, employees get their money back to cover the health costs. These expenses under an HSA are all tax-free, so there are no deductions.

HSA case study 

Let’s understand the working of an HSA with an example: Let’s assume you run a small business with eight employees. You’ve agreed to put $3,000 annually into each person’s HSA.

Now, say one of your employees goes to the doctor and pays $200 out of pocket. They submit the receipt to the policy administrator, who checks eligibility.

Once approved, your employee gets their $200 back. It’s all tax-free for them, and you get to write it off as a business expense, saving you money on taxes.

So, HSAs are a win-win: Employees get their health costs covered hassle-free, and employers save money while keeping their team healthy and happy.

Starting June 25, 2024, the government has proposed to increase the capital gains inclusion rate from 50 percent to 66.7 percent for any profits made by selling an asset. Instead of just half, they’ll count two-thirds of your profit as taxable income. 

While this change applies to all the capital gains a corporation or trust makes on or before June 25, 2024, there are some differences in how it will affect individuals. 

Who can set up an HSA?

In Canada, some employers can set up an HSA while some cannot. 

Employers eligible to set up an HSA:

• Incorporated businesses, including shareholder-employees and all other corporate employees 
• Corporations with as few as one employee can also be eligible

Employers ineligible to set up an HSA:

• Unincorporated businesses or sole proprietors unless they have at least one arm’s-length employee

Who does an HSA cover?

An HSA covers employees and dependents as defined in the Income Tax Act of Canada. Dental or extended healthcare plans may include a broader definition of dependants. 

Eligible employees are defined as individuals who:

• are registered in an eligible recognized program
• are employed in a position that is in a business carried on in British Columbia in the taxation year by an eligible employer
• have an eligible period in the taxation year

Eligible dependants are generally defined as individuals who are:

• Children, grandchildren, parents, grandparents, siblings, uncles, aunts, nieces, or nephews of the plan member or their spouse/common-law partner
• Dependent on the plan member for support at some point during the year
• Residents of Canada at some point during the year

Eligible expenses and the Canada Revenue Agency (CRA)

The Canada Revenue Agency (CRA) provides a guide and a comprehensive list of medical expenses on their website. Medical expenses that meet the CRA’s criteria are generally eligible for reimbursement from a plan member’s HCSA.

To ensure that expenses are eligible for reimbursement through an HCSA, the following conditions must be met:

• The expense must be incurred for medical services or products prescribed by a licensed medical practitioner
• The service or product must be necessary for the diagnosis, treatment, or prevention of a disease, ailment, or physical impairment
• Receipts and documentation must be provided to substantiate the expense

HCSA coverages, available funds, and carryovers

HCSA coverages, funds, and carryovers may vary from one insurance provider to another. Check out some of the basic information about HCSA funds:

Carryover policies

Carryover policies for HCSA can differ based on the employer’s plan design. Here are the key points regarding carryover provisions:

• Carryover amount: Typically, employees can carry over up to $500 of unused funds from one plan year to the next. This means any amount exceeding $500 at the end of the plan year will be forfeited
• Eligibility: To qualify for the carryover, employees must be active and eligible to participate in the HCSA at the time the funds are carried over. If an employee does not re-enroll for the new plan year, a new HCSA will still be created automatically for them, allowing access to the carryover funds
• Access to carryover funds: Carryover funds are generally available for reimbursement starting from a specified date in the new plan year, often after a run-out period for the previous year’s expenses

How to check HCSA balance

To view the balance in your HCSA, take the following actions:

• To access your HCSA account, visit the website of your plan provider
• To view your HCSA balance, navigate to the “Spending Account” or “Coverage & balances” section
• In your HCSA, look for the “Amount Remaining” for the current plan year. This will display the amount of your annual contribution that is still available for use toward qualified costs
• You might be eligible to receive a reimbursement for health insurance premiums that were withheld from your pay if you have any unused money from the prior year
• For assistance or specific inquiries, get in touch with your HCSA plan provider directly

Which expenses are eligible in an HSA?

When you have an HSA in Canada, you can apply for reimbursement for certain eligible expenses. Since remembering what is eligible and what is not can get confusing, we’ve listed these in the table below to help you keep track of them.

How much does it cost to include an HSA in a group plan?

A Health Spending Account in a group plan is priced depending on the number of employees you want to cover, the amount you want to contribute per employee, and your provider’s pricing structure. 

You must offer a minimum of $250 per employee, which can then be adjusted in increments of $50, up to a maximum of $15,000 per employee per year. Additionally, you can set different amounts for different employee categories such as owners, managers (Class A), and all other staff (Class B).

Once the HCSA is established, employees can submit reimbursement claims akin to other benefits. Each claim is reviewed for eligibility, reimbursed to the employee accordingly, and invoiced monthly for all claims, plus a 10% administration fee.

Each year, the HCSA amount resets for your employees, and a minimum annual administration fee of $100 per policy is charged. If you wish, you can choose to modify the HSA amount during renewal.

We’ll help you understand better with an example.

Let’s say an employer wants to include an HSA as part of their group benefits packages for 50 employees. The HSA provider they choose charges a flat fee of $10 per employee per month for administering the HSA. Additionally, the employer decides to contribute $500 per year to each employee’s HSA.

This is how the pricing will be calculated:

So, the total cost of including an HSA in the group plan would be $6,000 per year, plus an additional $25,000 per year for the employer’s contributions to employees’ HSAs. This totals to $31,000 per year in HSA-related expenses for the employer. 

What are the benefits of an HSA?

An HSA comes with many benefits that make it lucrative, but let’s understand through examples what an HSA’s most important perks are:

Let’s say an employee needs dental work not covered by their provincial healthcare plan. With an HSA, they can easily claim reimbursement for the expenses incurred, including check-ups, fillings, or even major procedures like root canals or crowns.

This lets employees address their diverse medical needs without worrying about out-of-pocket expenses.

Think of an employer who wants to provide his employees additional benefits like a gym membership and therapy sessions. Through an HSA, he can not only offer these perks but can also let his employees choose the benefits they want.

Let’s say a mid-sized company is planning its annual budget. With an HSA in place, they can confidently allocate funds knowing that their healthcare expenses are predictable and manageable.

Unlike traditional group benefit plans that have annual premium fluctuations, the stability of an HSA allows for more accurate financial planning.

Think of an employee with a pre-existing medical condition requiring ongoing treatment. With an HSA, they have access to comprehensive coverage, including medications, therapies, and specialist consultations.

This inclusive approach ensures that all employees, regardless of health status or age, can access the care they need without facing barriers or exclusions.

Employees appreciate the flexibility to use their HSA funds for a range of healthcare needs, from prescription medications to wellness services like massages or gym memberships. This not only prioritizes the employee’s health and well-being, it also improves job satisfaction and loyalty to the organization.

How are HSA benefits taxed?

Health Spending Accounts (HSAs) are taxed differently for employees and employers. 

Taxation for Employers:

• Employers can deduct contributions made to employees’ HSAs as business expenses, leading to tax savings
• Contributions to HSAs are generally tax-deductible for employers

Taxation for Employees:

• Reimbursements from HSAs for eligible medical expenses are typically 100% tax-free
• However, in Quebec, HSAs are considered taxable benefits for provincial income tax purposes
• To ensure non-taxable health benefits, employers must set up a Private Health Services Plan (PHSP) according to Canada Revenue Agency (CRA) guidelines

As per the Canada Revenue Agency (CRA), a Private Health Services Plan (PHSP) must include the following criteria:

• The PHSP must be in the nature of insurance
• Coverage is limited to hospital, medical, or dental expenses, including expenses related to medical treatments
• The plan extends coverage to both employees and their dependents

HCSA administration fees

Administration fees for HCSA usually apply and vary based on the plan and provider. The following are important details about HCSA administration fees:

• Overarching framework: A common way to charge HCSA administration fees is as a percentage of the claims processed. For instance, certain plans might charge an administration fee of 10% of the total number of claims that employees file. Usually, the employer receives an invoice for this cost rather than the employee
• Monthly fees: Employees participating in the HCSA program may occasionally be required to pay a monthly pre-tax fee. This fee structure may change depending on the employer and plan design
• Fees for processing claims: Third-party administrators may impose extra charges for handling claims, which may further increase the total

Check out to learn more about whether group benefits cover mental wellness plans

How can I submit an HCSA claim?

To submit a claim for a Health Care Spending Account (HCSA), you can follow these steps:

Online submission

• Go to the website of your plan provider and log into your HCSA account
• Go to the “Submit a Claim” or comparable area
• Enter the patient’s information after choosing the claim type (health, dental, vision, etc.)
• Give the amount, description, and date of the service
• Upload a picture of the invoice or any supporting records
• Examine and send in the claim

Offline submission of paper claims

• Visit the website of your plan administrator or provider to obtain the relevant claim form
• Fill out the form with your contact details, claim information, and HCSA contract number
• If you want to authorize payment from your account, check the “HCSA” box on the form
• Make sure to affix the original receipts

Unused HCSA funds

Employers usually determine how unused funds in an HCSA are handled. The following are the main details on what happens to any money left over from HCSA:

• Choices for carryover: Employers may permit the rollover of unused HCSA into the following plan year. The maximum amount that can be carried over is usually $500, though some plans may have lower or no limits at all
• Forfeiture: If the employer does not permit carryover, any unused funds at the end of the plan year will be forfeited. Employees will, therefore, no longer be able to access these funds
• Claims carryover: In certain situations, claims that are filed but for which there is not enough money in the HCSA account may be reimbursed from the HCSA funds for the following year

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How long is an HSA deposit available?

An HSA deposit can cover expenses during the plan year and any applicable carryover period that an employer decides. There are two carryover types: credit and claims. An HSA can have either one type or none at all.

Credit carryover: At the end of the benefit year, if a plan member has unused funds in their HCSA, they can carry over this balance to the following year. This transferred balance remains available for use for 365 days after the end of the plan year. 

Claims carryover: If a plan member has expenses that couldn’t be covered under the current HCSA due to insufficient funds or a zero balance, they can submit these claims to be covered by the deposit made into the HCSA for the following year. 

No carryover: Some plans don’t permit any carryover of funds or claims to the next benefit year. In such cases, any unused funds in the HCSA at the end of the benefit year are forfeited, and claims must be covered within the same year they occur.

What is the difference between a health spending account and a Lifestyle Spending Account (LSA)?

Health Spending Accounts (HSAs) and Lifestyle Spending Accounts (LSAs) are benefits that help employers support their employees’ needs beyond traditional health insurance.

While HSAs primarily focus on covering medical and dental expenses, LSAs extend benefits to various lifestyle-related expenses, such as gym memberships, yoga, meditation, etc promoting holistic well-being.

Can’t decide which insurer to go with? Our experts will help you pick the best group health plan!

At PolicyAdvisor, we have a team of licensed insurance experts who will guide and help you find the best HSA plan. With our expertise, we’ll make sure you get the most out of your HSA and are able to offer your employees comprehensive coverage and maximum benefits.

Are health spending accounts taxable in Canada?

Health Spending Accounts (HSAs) are not taxable for employees in Canada. Contributions made by employers to an employee’s HSA are considered a non-taxable benefit, and reimbursements received for eligible medical expenses are also tax-free.

How do I withdraw money from my Health Spending Account?

Employees can withdraw money from their Health Spending Account (HSA) by submitting claims for eligible medical expenses to their HSA provider. Once the claim is approved, the reimbursement is processed and deposited into the employee’s designated bank account.

What can I use my HSA for?

HSAs in Canada can be used to cover a wide range of medical expenses, including dental care, vision care, prescription drugs, paramedical services (such as massage therapy or chiropractic treatments), medical equipment, and more.

Can I use HSA funds for medical expenses abroad?

HSA funds can generally be used for eligible medical expenses incurred abroad, as long as the expenses are medically necessary and meet the criteria outlined by the HSA provider. 

What happens to my HSA if I leave my employment mid-year? What is the deadline for submitting claims?

If you leave your employment mid-year, you may lose access to their Health Spending Account (HSA) benefits, depending on the employer’s policy. Any unused funds in the HSA may be forfeited, so it’s essential to check with the employer or the policy administrator for specific details. Additionally, the deadline for submitting claims may vary and be 30, 60 or 90 days after the end of the HSA plan year.

Can I purchase an HSA even if my employer doesn’t offer one?

Yes, you can open an HSA independently if your employer doesn’t offer one.