What are health Spending Accounts (HSAs) and how do they work in Canada?

Health Spending Accounts (HSAs) also known as Healthcare Spending Accounts (HCSAs) are versatile and tax-efficient benefits that can help organizations attract and retain top talent. In this article, we delve into how Health Spending Accounts work in Canada and what they can offer organizations and employees.

What is a Health Spending Account (HSA)?

A Health Spending Account (HSA) is a versatile health benefits plan that enables employers to offer tax-free health benefits to their employees. The process is straightforward: employers allocate a fixed dollar amount to each employee’s virtual health wallet. Employees can then claim reimbursement for qualified health expenses by simply submitting the receipts through our platform. HSAs cover a wide range of eligible healthcare expenses, including dental care, vision, prescription drugs, and more than 100 other health expenses.

Who Can Open an HSA?

Health Spending Accounts can be opened by Canadian operating companies and non-profit organizations for their employees, including employees who are also shareholders. It’s important to note that holding companies are not eligible for HSAs. Additionally, sole proprietors and partnerships have the opportunity to open HSAs for themselves and all of their staff, provided they have at least one arm’s length employee. An arm’s length employee is someone who is not related to the business owner. If you have a sole proprietorship and all your employees are related to you, you won’t be eligible to open an HSA.

How do Health Spending Accounts work In Canada?

An HSA is funded through contributions made by the employer. When an eligible expense is incurred, the employee can submit a claim to the HSA provider for reimbursement. This reimbursement is tax-free and does not count towards the employee’s taxable income. The HSA provider then invoices the employer for the claimed amount, along with an administration fee.

For example, if an employee incurs a $200 dental expense, they pay the bill and are subsequently reimbursed the full $200. The employer is then billed $200 + (8% administrative fee) + 5% GST on the admin fee, resulting in a total of $216.80. It’s important to note that the $216.80 is fully tax-deductible as a corporate expense, and the $200 dental expense is considered a non-taxable benefit for the employee.

Key Benefits of a Health Spending Account (HSA)

Tax Advantages

One of the most significant advantages of an HSA is its tax efficiency. Contributions made by employers are tax-deductible, while reimbursements to employees for eligible expenses are tax-free.

Flexibility

HSAs offer unparalleled flexibility when it comes to eligible expenses. Employees can use the HSA to cover a wide range of healthcare expenses, including dental, vision care, prescription drugs, paramedical services, and over 100 other health expenses. This flexibility allows employees to tailor their benefits to their unique healthcare needs.

Attraction and Retention

Offering an HSA as part of your benefits package can make a small business more attractive to prospective employees. It’s also a valuable tool for employee retention.

Setting Up a Health Spending Account

Eligibility

HSAs are available to incorporated businesses, non-profits, as well as sole proprietors and partnerships with one or more arm’s length employees.

Steps to Create an HSA

1. Create Groups of Employees

To build an HSA based benefit plan you first have to separate your employees into groups. You could have groups called Part-Time Staff, Managers, Junior Accountants, and Senior Web Developers. The name of the group doesn’t matter as much as ensuring that all members of a group have similar duties and responsibilities. For smaller organizations with many different roles, it’s acceptable to group people with different roles together. However, employees with similar duties and responsibilities cannot be in different groups.

2. Determine the Health Credit Amount for Each Group

Once you have established your groups, you need to determine how much health credit to allocate. For example, you might decide that everyone in the group called “Junior Accountants” will each receive a $3000 health credit every year.

We typically recommend $500-$2,999 for regular staff, $3,000-$7,999 for professionals and managers, $8,000-$24,999 for senior staff, and $25,000-$50,000 for executives, business owners, and high-income earners. These are broad suggestions; the choice is ultimately yours as long as it fits within the guideline of no more than 25% of an employee’s before tax salary. So if someone makes $80,000 per year, then cannot have an HSA with a credit of more than $20,000 per year.

3. Creating the Health Wallet and Attaching Employees

Create Health Wallets based on these groups. Next you will attach your employees to the each of the Health Wallets. Every employee attached to that Health Wallet will receive a quarterly health credit based on the annual plan amount.

4. Funding the HSA

Funding an HSA is a straightforward process. The employer decides on the annual allocation amount. The actual claims made up to the total allocated amount are tax-deductible business expenses, and these funds are used to reimburse employees for eligible medical expenses.

At Coastal HSA, businesses fund their plans with a 15% refundable deposit based on the total plan value. So a business with $20,000 per year plan would make a $3000 refundable deposit.

Eligible Expenses

It’s important to understand what expenses are eligible for reimbursement under an HSA. You can find a complete list here

Conclusion

Health Spending Accounts (HSAs) are a powerful tool that benefits both employers and employees. It offers tax-free health benefits, flexibility, and an efficient way to manage healthcare expenses. HSAs are flexible, easy to use, and affordable.

At Coastal HSA, we charge 8% per claim without any additional fees, establishing us as one of the most cost-efficient health benefit plans in Canada.