What is a Health Spending Account & How Does it Work?

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.

What is a Health Spending Account (HSA)?

A Health Spending Account (HSA), alternatively referred to as a Health Care Spending Account (HCSA) or Health Reimbursement Account, is a personal healthcare fund designated for employees and their eligible dependents.

It can be used to pay for any health, dental, or paramedical expenses not included in provincial health insurance or employer-sponsored group benefit plans.

The coverage limit of the HSA is set by the employer and contributions can be made according to the employees needs and budget, up to the fixed amount.

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:

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

Paying for health expenses: Employees pay for their health services upfront, whether it’s a doctor’s visit or a massage

Claiming reimbursement: Employees submit their claim online on the insurance company’s platform where it is then checked for approval

Getting money back: Once approved, employees get their money back without any deductions since it is tax-free

What are the benefits of a Health Spending Account (HSA)?

Offering an HCSA can provide several benefits for both employers and employees:

Benefits for employers:

• Tax advantages: Contributions to HSAs are tax-deductible for employers, reducing the overall tax burden
• Cost control: HSAs can be paired with high-deductible health plans (HDHPs), which often have lower premiums than traditional health plans, potentially reducing the company’s healthcare costs
• Reduced administrative costs: Compared to more complex health benefits plans, HSAs might have lower administrative costs

Benefits for employees:

• Tax benefits: Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free
• Savings for future healthcare costs: HSAs can be a savings tool for future medical expenses, including those in retirement. This can be especially useful for high-deductible plans with higher out-of-pocket costs
• Portability: The account belongs to the employee, so it remains with them if they change jobs

Which expenses are eligible in an HSA?

The list of eligible expenses are based on the specific plan and a complete list of eligible HSA expenses can be found on the CRA website. Some of the eligible expenses in an HSA are:

• Dental: non-cosmetic dental care procedures
• Medical: Diagnostic tests, prescription drugs, catheters, diabetic supplies, therapists (e.g., massage, chiropractor, physiotherapist), transportation or lift supplies
• Vision: Prescription glasses/laser eye surgery

How much does it cost to include an HSA in a group plan?

A Health Spending Account in an employee benefits 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. 

The employer can select the overall coverage limit and also set different amounts for different employee categories such as owners, managers (Class A), and all other staff (Class B).

The cost of HSA account typically includes:

• Admin fee: approximately 8-10% of allotment amount
• Claim fee: approximately $3.95/claim submission
• Annual account fee: typically $100/year

Some companies may only change an admin percentage fee and no annual fee, this can vary with different insurance companies.

Is there an administration fee for HSA?

Administration fees for HCSA usually apply and vary based on the plan and provider. A common way to charge HCSA administration fees is as a percentage of the claims processed. For instance, certain plans might charge an administration fee of 10% of the total number of claims that employees file.

Who can set up an HSA?

To be eligible for HSA, the business has to be incorporated and the employees getting the HSA should be receiving T-4s. Small businesses with two or more employees can also set up an HSA.

Self employed proprietors who are not incorporated as a business would not be eligible to set up an HSA.

Who does an HSA cover?

An HSA covers both employees and their dependents. The eligible dependents covered in HSA are broader than a traditional group plan which only covers spouses and children as dependents.

Eligible dependents for HSA are generally defined as (this may vary depending on the insurance provider):

• 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

How are HSA benefits taxed?

Health Spending Accounts (HSAs) are taxed differently for employees and employers. 

HSA taxation for employers: Contributions to HSAs are generally tax-deductible for employers. Employers can deduct contributions made to employees’ HSAs as business expenses.

HSA 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. There are two types of HSA options in Canada:

Stand-alone HCSA (Private Health Services Plan/PHSP): A stand-alone HCSA functions independently of traditional health insurance plans. The employer fully funds the account, determining the amount available for each employee or class of employees. This funding is tax-deductible for the employer, and benefits received by employees are tax-free.

HCSA as part of a group benefits plan: Integrated into a group benefits plan, this option supplements existing health and dental coverage. Employees typically submit claims through their standard group benefits plan first, and any remaining eligible expenses can then be claimed through the HCSA. 

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

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

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

Can’t decide which insurer to go with? Our experts will help you pick the best group health plan!

At PolicyAdvisor, we have a team of licensed insurance experts who will guide and help you find the best group 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.