DFK Tax Newsletter
Health Spending Accounts
By Jeff Saunders, CPA, CA, Tax Partner, Teed Saunders Doyle, Fredericton, NB, DFK Affiliate Firm
We have recently seen an increase in the number of clients inquiring about Health Spending Accounts (or “HSA”, also referred to as “Health Care Spending Accounts” or “HCSA”). Because of this, we thought it would be helpful to provide a brief summary of what HSAs are and how they are taxed.
What Is An HSA?
According to CRA1, “HSAs are self-insured health plans arranged by employers for their employees residing in Canada. They provide a way that small businesses can provide tax-free health and dental benefits to their employees (and their employees’ family members). This makes the HSA appear to be an extremely attractive and cost-effective way of getting and providing health and dental benefits.”
How Does An HSA Work?
Manulife, one of several companies that sells HSAs in Canada, describes the operation of an HSA as follows2:
“Essentially an HCSA operates like this:
- A plan sponsor decides how much to deposit in an employee’s HCSA for the year
- The employee (i.e., plan member) submits claims for medical expenses to be reimbursed from their HCSA
- The insurer processes the claims according to the plan rules selected by the plan sponsor
- The plan member continues to submit health and dental claims until the HCSA balance is zero or is no longer available for use”
How Are HSAs Taxed?
The benefits that an employee or employee’s family member receives under an HSA (i.e., reimbursement of medical expenses) will be tax-free if the plan meets the criteria set out by CRA for a Private Health Services Plan (“PHSP”). In order to qualify as a PHSP, all of the following criteria must be met3:
- “All of the expenses covered under the plan are:
- medical and hospital expenses (medical expenses)
- expenses incurred in connection with a medical expense and within a reasonable time period following the medical expense (connected expenses)
- a combination of medical expenses and connected expenses
- All or substantially all of the premiums paid (generally 90% or more) relate to medical expenses that are eligible for the medical expense tax credit (METC)
- The plan meets the conditions outlined in paragraph 3 of the Interpretation Bulletin IT-339R, Meaning of private health services plan [1988 and subsequent taxation years]”
For the employer, the payments made into a valid HSA will be a deductible expense for tax purposes.
Can My Business Setup An HSA?
“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 as well.
In the case of unincorporated businesses or sole proprietors, the owner and their employees are also eligible if the owner has at least one arm’s-length employee.” 4
HSAs can be a flexible way to provide coverage of qualifying medical expenses for you and your employees. In many cases, they are used as a supplement or add-on to an existing health and dental plan. You should discuss the details of a plan with your insurance provider and your tax advisor to see if an HSA would be beneficial for you and your employees.