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What is a Health Spending Account and How Does it Benefit Employees?

SUMMARY

A Health Spending Account (HSA) is a tax-efficient solution for Canadian employers to provide comprehensive healthcare benefits to their employees. It offers tax-free reimbursements for healthcare-related expenses and promotes employee well-being. Employers set coverage limits and contribute funds, and employees claim reimbursements—making it a smooth process. With tax benefits for both employers and employees, HSAs provide a win-win solution for all parties involved.

IN THIS ARTICLE

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.

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What is a
Health Spending Account?
A Health Spending Account (HSA), alternatively referred to as a Health Care Spending Account (HCSA) or Health Reimbursement Account, is a personal fund designated for employees and their eligible dependents. It covers health and dental expenses not included in provincial health insurance or employer-sponsored group benefit plans, up to a fixed amount.
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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.

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.

Case Study of an HSA 

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
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Our Experts’ Advice

Insurance agents/brokers and financial planners sometimes market HSAs to sole proprietorships without arm’s-length employees, suggesting that additional insurance purchases can make them compliant with Private Health Services Plan rules. However, this approach is not acceptable and does not make such sole proprietors eligible for setting up an HSA.

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

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.

Category Eligible Expenses in an HSA
Dental Dental care (non-cosmetic procedures)
Medical Diagnostic tests
Medical Prescription drugs
Medical Catheters
Medical Diabetic supplies
Vision Prescription glasses/laser eye surgery
Medical Therapists (e.g., massage, chiropractor, physiotherapist)
Medical Transportation or lift equipment

Category Ineligible Expenses in an HSA
Wellness Health supplements and vitamins
Medical Over-the-counter or non-prescription medications
Cosmetic Cosmetic surgery
Medical Devices or equipment for exercise
Medical Attendant Care Expenses

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:

Description Amount
Flat fee per employee per month $10
Number of employees 50
Annual contribution per employee $500
Total cost for administering the HSA $6,000
Total contribution by the employer $25,000

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:

Improved flexibility

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.

Affordability

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.

Promotes financial planning

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.

Comprehensive coverage

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.

Employee satisfaction

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

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. However, any remaining funds after this period expire or are forfeited.

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. These claims are carried over and paid out from the funds deposited into the HCSA for the next year, typically for 365 days. Similarly, any unused funds after this period expire or are forfeited.

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.

Feature Health Spending Account (HSA) Lifestyle Spending Account (LSA)
Purpose Covers medical and dental expenses Covers lifestyle expenses like fitness memberships, childcare, and education
Eligible Expenses Limited to healthcare costs Covers lifestyle expenses beyond healthcare
Tax Treatment HSA benefits are tax-free for employees and tax-deductible for employers LSA benefits are taxable for employees and tax-deductible for employers
Flexibility It allows customization for healthcare needs based on an employee’s seniority in the organization, the nature of their employment, etc It offers flexibility for various lifestyle expenses like nutrition supplements, internet access, travel, etc
Employee Engagement HSA keeps employees satisfied with healthcare coverage LSA promotes well-being with lifestyle support
Impact on Recruitment and Retention It attracts talent with comprehensive healthcare benefits and helps retain them It strengthens employer and workspace appeal with inclusive lifestyle support
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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.

Frequently Asked Questions

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.

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KEY TAKEAWAYS

  • The Canadian government has proposed an increase in the capital gains inclusion rate in Canada
  • Currently, when you make a profit on the sale of an asset, half of that is counted as taxable income. Simply put, you pay taxes on 50 percent of your capital gain
  • Starting June 25, 2024, the government has proposed to increase the capital gains inclusion rate from 50 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
  • The proposed change is expected to impact both individuals and corporations
  • Individual taxpayers would continue to pay tax on 50 percent of their capital gains up to $250,000, even after June 25, 2024
  • The proposed capital gains tax do not have the $250,000 limit for corporations

By Jiten Puri
CEO & Founder, Insurance Advisor, LLQP
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