Health Spending Account
What is HSA?
An HSA (health spending account) is a Canada Revenue Agency-approved method to provide medical, dental, and vision benefits in a tax-efficient manner for employees of an incorporated business. It is not an account per se but a way to pay for employees' medical expenses. The medical expenses have to be processed through an approved HSA provider (not an accountant of the business). HSA is not available in Quebec.
Who can qualify under HSA?Incorporated businesses, including shareholder-employees and all other full time corporate employees, are eligible to participate in an HSA. Family members are also eligible. Corporations with as few as one employee can be eligible as well. An HSA is meant to be treated as an employee benefit and not a shareholder's benefit.
( https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2019/warning-buyer-beware-when-it-comes-to-health-spending-accounts.html )
How does HSA work?
The employee pays for the medical expenses out of his/her pocket, and the corporation reimburses him/her tax-free (meaning the reimbursement is not an income to the employee). The corporation writes off 100% of the costs related to the employee's medical expenses (meaning it is a 100% tax-deductible expense to the business).
Does HSA cost money?
Yes, different HSA providers charge different fees. Usually, the cost is around 10% of the medical expense plus GST on this fee (Please note, the province of Ontario charges additional provincial taxes which are quite substantial). Some providers might charge an annual maintenance fee or a one-time fee to open an HSA. This fee is also tax deductible for the business.
- The employee (EE) pays out for the medical expense for himself/herself or one of the family members.
- EE submits the medical receipt to the HSA provider site.
- The next day, money is taken from the employer's (ER) business bank account (the amount is equal to that the ER will reimburse EE plus a 10% fee), and reimbursement is deposited to the EE bank account.
-Refund is not taxable to the EE, and the whole amount is tax-deductible to the ER
The Canada Revenue Agency (CRA) determines the eligible expenses for an HSA. There is a long list of what is eligible under an HASA; here are examples of expenses that can be claimed through an HSA:
- Ambulance Services;
- Prescribed drugs
- Travel insurance cost
- Cancer Treatment;
- Dental Services;
- Vision Care;
- Fertility Treatments;
- Hearing Aids;
- Diagnostic service expenses like MRI or lab tests
- Employee premiums paid to non-government medical plans. Only accepted Health, Dental, and Vision premium payments.
- The complete list of the eligible medical expenses can be found on the CRA site
HSA vs Traditional Medical Insurance Plan (TIP):
TIP - You pay monthly premiums even if you do not use the TIP. The TIP premiums are paid after you pay tax on your money.
HSA - Has no premiums. The business pays a fixed fee to the HSA provider and only for the expenses the employees claimed. The whole amount is tax-deductible to the company.
TIP - Benefits are limited to the number of visits and treatments and reimbursement amounts. An individual must participate in each claim and pay a certain amount (i.e. deductible) out of the pocket first
HSA - No deductible and no limits on visits and treatments. The business can set a limit per employee on how much each employee can claim per year.
TIP - Medical history will be requested, and pre-existing conditions will affect the coverage (and may be the cost).
HSA - Benefits won't be affected by medical history.
TIP - the insurance company determines the limit on each category.
HSA - the employer determines the limit per employee, and any allowed (by CRA, Link above) medical expense for any family member can be used up to this limit.
In either the TIP or HSA option, the employer does not know how his/her employee spent money on; the only assurance they have is that the money was spent on eligible medical expenses.
HSA also can supplement the TIP; the options do not contradict each other, and premiums paid for the TIP can be deducted through HSA.
As a matter of eligibility for a Health Spending Account, your group/company must meet the following requirements:
1. Must be an active business. The business cannot just generate passive income (such as a corporation that holds rental properties and generates passive rental income).
2. The benefit is available to all full times employees, including those who are neither a shareholder nor related to a shareholder (although limits to access HSA can be different for each employee).
3. Employees who are also shareholders must be collecting T4 income rather than exclusively paid through dividends.
HSA can be available to part-time employees but not for contractors or sub-contractors that the business hires.
Questions? How to open an HSA?
Please get in touch with us at contact @ artemfinancial.ca or call 403 690 8622.