How HSAs Can Save Canadian Small Businesses and Employees Money Through Tax Advantages

As a small business owner in Canada, it’s essential to identify ways to grow your business while keeping costs under control. Have you considered the tax-saving potential of Health spending accounts (HSAs) and HSAs can save Canadian small businesses.

HSAs are a powerful tool that can help you and your employees save money through attractive tax benefits. These accounts allow you to allocate pre-tax dollars towards a wide range of eligible medical expenses, providing your team with the flexibility to choose the healthcare services they need most.

But how exactly do HSAs work, and what makes them advantageous for Canadian small businesses? Let’s dive into Health Spending Accounts – from how HSAs differ from traditional health insurance plans to how your employees can enjoy tax-free health benefits tailored to their needs.

Whether you’re a small business owner looking to optimize your employee benefits package or an employee seeking to understand how HSAs can benefit you, this guide will provide the knowledge you need to make informed decisions about your healthcare spending.

A Quick Primer On Health Spending Accounts (HSAs)

Health Spending Accounts (HSAs) are employer-sponsored, tax-advantaged accounts that allow businesses to allocate a fixed amount of money each year for their employees to use for eligible medical expenses. Employees can then submit claims to reimburse these expenses using pre-tax dollars allocated to their HSA.

The Canada Revenue Agency (CRA) determines which medical expenses are eligible for reimbursement through an HSA. Some examples include:

Prescription medications
Dental care
Vision care (e.g., eye exams, glasses, contact lenses)
Paramedical services (e.g., physiotherapy, massage therapy, chiropractic care)
Medical devices and supplies (e.g., hearing aids, orthopedic shoes, mobility aids)
Mental health services (e.g., counseling, therapy)

Who qualifies for an HSA? Canadian corporations, nonprofits, and sole proprietorships + partnerships with at least one arm’s length employee are eligible.

What Are The Tax Benefits of Health Spending Accounts?

Tax-Deductible Expenses for Employers

One of the most significant advantages of HSAs for Canadian small businesses is that all funds allocated to these accounts and administration fees are considered tax-deductible business expenses.

Tax-Free Benefits for Employees

HSAs offer employees a significant tax advantage when paying for eligible medical expenses. Contributions to an HSA are made with pre-tax dollars, reducing taxable income. Any HSA reimbursement for qualified medical expenses is not considered taxable income.

If you compare this to paying for health-related costs with after-tax dollars you’ll be using money already subject to income tax, resulting in lower take-home pay.

Reduced Premiums Compared to Traditional Health Insurance

Traditional health insurance plans often have high monthly premiums, which can be a significant expense for small businesses.

By implementing an HSA, employers can control their healthcare costs by setting a fixed annual budget for each employee’s account. This pay-per-use model ensures that businesses only pay for the medical expenses actually incurred by their employees rather than a predetermined premium.

An Example of an HSA Savings

With an HSA, if your annual income is $80,000 and you have eligible health expenses amounting to $5,000, you’ll only pay tax on your salary, not on your health benefits. In this scenario, the individual receives a $5,000 transfer from the business, and no tax is applied. This tax advantage is designed by the Government of Canada to encourage extended healthcare accessibility. The cost of processing this $5,000 through an HSA at Coastal is minimal, with a $400 admin fee (calculated as 8% of the total).

Someone earning $80,000 would need an income of approximately $86,700 to enjoy the same benefits without utilizing an HSA. This calculation includes $1,700 in taxes and $5,000 in health spending. Utilizing an HSA leads to significant tax savings, with the individual in this example saving $1,300 annually ($1,700 tax – $400 admin fee).

The Financial Advantage

In this example, the potential annual savings is $1,300, but the tax savings become greater if your taxable income and health spending are greater. Establishing a pay-as-you-go account with Coastal HSA, which entails no setup fees or monthly charges, is an easy tax saving solution for small business owners.

A More Efficient Way To Allocate Funds for Healthcare Needs

HSAs offer a high degree of flexibility, allowing employers to tailor their plans to their business needs and budgets.

First, employers categorize employees into groups and then determine the annual health wallet allocation for each group. This customization allows small businesses to offer valuable health benefits to their employees while managing costs effectively.

Enhancing Employee Satisfaction and Retention

Offering comprehensive health benefits is key in attracting and retaining top talent. By providing an HSA, small businesses demonstrate their commitment to their employees’ well-being, increasing job satisfaction and loyalty.

Plus, the flexibility and tax advantages of HSAs can be a compelling selling point for potential hires, helping small businesses compete with larger companies for skilled workers.

Tips for Implementing HSAs For Canadian Small Businesses

Learn The Ins-and-Outs of HSAs

Knowledge is key to ensuring a successful HSA program. Familiarize yourself with the basics of HSAs, including eligibility requirements, dependent coverage, and qualified medical expenses. This can help you communicate effectively with your employees. To ensure the non-taxable status of these benefits, it’s crucial to adhere to the Canada Revenue Agency’s (CRA) rules. Coastal HSA takes care of compliance when setting up HSAs, making the setup process seamless. For an in-depth exploration of the CRA rules, check out our detailed article.

Setting Up and Managing the Plan

Setting up your plan is straightforward. First, you’ll need to decide on the annual allocation amounts for each employee category. For example, you could have an employee group called “Senior Web Developers” and make that Health Wallet amount $5000 per year. This means every employee attached to that Health Wallet would receive a health credit for $5000 per year.

Once you’ve created all the Health Wallet groups and attached the employees to each group, you can then activate your plan with a refundable deposit. Once your plan is active, all employees attached to a Health Wallet will receive a welcome email with details on how to access their account.

Communicating Benefits to Employees

To maximize the value of your HSA, you’ll want to communicate the plan’s benefits and features to your employees. Get creative with your communication and share the plan’s benefits – the more transparent you are about the plan, the more likely employees will be to take advantage of it.

Is it Time for Your Canadian Small Business to Consider an HSA?

Who wouldn’t want to take advantage of a win-win situation? By taking advantage of the tax benefits and cost savings offered by HSAs, you can provide your employees with the support they need to prioritize their health while keeping your business’s finances in check. Plus, owners who are employees of their business can see savings as well!
Don’t miss out on this hidden gem of employee benefits explore the potential of Health Spending Accounts HSAs can save Canadian small businesses today. At Coastal HSA, we can help you understand the ins and outs of HSAs and how they can benefit your company. Contact us today to get started!