Health Spending Account (HSA) and How Does It Work in Canada?

An Health Spending Account (or Health Care Spending Account) is a simple system for Canadian employers to provide tax-free health and dental benefits to their employees and their families, with benefits for both parties.

For the employer:

• The health benefits are fully tax-deductible, which can help a small business save money while still protecting their employees

For the employees:

• Benefits for them and their (family/children) are 100% tax-free.
• They don't have deal with co-pay or deductibles.
• They can claim a variety of HSA eligible medical expenses and dental expenses, some of which are not covered under regular health plans, and the claims are reimbursed by the insurance company.

An health spending account should be considered an investment by employers in their staff. This will result in happier employees who contribute to the growth of the business.

A Health Care Spending Account is also referred as Health Care Expenses Account, Private Health Spending Plan, Private Health Services Plan, Costs Plus, Lifestyle Spending Account or Health Care Spending Account.

How Does an Health Spending Account Work?

An HSA is a good alternative to a traditional health policy for both the employer and employees and have flexible spending options.

Moreover, an HSA is easy to setup and manage, and there are;

• No monthly premiums
• No co-pay or deductibles
• No complex policies or hidden fees.

Plus, it is much cheaper than traditional health insurance. Employers who already have a group benefits plan in place can also set up a HSA. If the traditional health plan doesn’t provide comprehensive coverage, you can use an HSA for supplemental coverage.

HSAs are typically used to pay for eligible expenses such as prescription drugs, doctor visits, dental care, vision care (including contacts), hearing aids, chiropractic needs and other medical services. It can even be used for a massage!

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Here’s an overview of how a Health Care Spending Account works:

• First, the employer defines coverage limits offered to employees' HSA based on their title. For example, $20,000 for Senior Managers, $10,000 for Managers, and $5,000 for other employees.  

• The employer funds the HSA by depositing funds.

• The individual employee pays the expenses out of pocket at the time of service.

• Afterward, the employee files a claim and receives reimbursements tax-free.

• The employer's funding account pays the bill and a small administration fee (~15% fee, to cover administrative charges)

• The claim amount the employee receives is 100 percent tax-free. This means they don’t have to report it as taxable income.

• Employees get reimbursed 100 percent of their claims, up to their annual non taxable benefit limit balance.

• The employer doesn’t have to pay any monthly premiums — only taxes and the administration fee.

Let’s consider an example. Suppose you are a business and want to create a HSA for each of your eight full-time employees. You have agreed to fund each worker’s HSA with $3,000.

An employee visits a medical practitioner and pays for expenses out of his pocket. Afterwards, he submits a claim for these expenses to a 3rd party administrator. The administrator will check whether the claim is legitimate and within the permissible claim limit.

Once the claim is approved, the employee receives a full refund for their healthcare expenses. This money is completely non-taxable. And you, the employer, can write it off as an expense and save tax for businesses.

What are the benefits of an HSA?

Here are the main advantages of setting up a HSA, for both the employer and the employees.

Added flexibility

With a Healthcare Spending Account (HCSA), your employees get reimbursements for a variety of eligible expenses that provincial healthcare plans don’t cover.

For example, a provincial medicare plan generally doesn’t cover dental care, other forms of dental coverage, vision care, psychologist care, and more. If your employees have access to an HSA, they can claim 100 percent of these expenses, up to their yearly limit.

Your employees can also use a HSA to pay insurance deductibles and co-insurance payments.

• A deductible is the amount the policy holder must pay before their health insurance kicks in.
• A co-insurance payment is the specified percentage the policy holder pays out-of-pocket with a private health services plan.

Perhaps the best part about an HSA is that your employees get to decide how their individual HSA money is spent.

For instance, someone with a health spending account with an annual limit of $3,000 may decide that the funds will be used to:

• Cover prescription medicines for themselves
• Dental care for their children
• Physiotherapy for their family
• Help pay tuition for a student
• Wellness spending on things like massages, and more

Significant health savings

A Health Care Spending Account in Canada is a cost effective way which provides a group benefits plan alternative to traditional group health insurance. An employer needs to pay only the claim amount, plus a fixed fee. There’s no maintenance fee, setup fee, or monthly premium.

When the member plan year ends, the health spending account funds can get carried forward. So, the employer doesn’t have to pay anything if there are no claims. In other words, an health spending account is a very convenient pay-as-you-go arrangement.

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The case study above is an example of how much you could save by using an health spending account.

Let's say you have a $3,000 dental expense:

• In the first scenario, you would need to pay for the expense out of pocket. Once you consider income tax, you would end up paying a total of $4,800.
• In the second scenario, let's say you instead pay the $3,000 expense using an HSA. Since the expense is not taxable, you will not have to pay any income tax on the amount. There is an HSA fee, however in this case it is only $499, so your total comes out to $3,499. This means your savings would be $1,301!

No renewal shock

With a group benefit plan, the premiums may go up on an annual basis. If you offer group health insurance for free, the annual increase in premiums can put a strain on your finances. You may even find yourself in a situation where you have to reduce coverage to avoid premium increases. In contrast, an HSA only charges you an administrative fee over and above the claim amount.

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More control

As an employer in Canada, you get to select the maximum health spending account contribution limit for each employee class. Moreover, you can increase this limit or decrease it according to your business abilities.

All pre-existing medical conditions are covered

Some group health plans may not extend coverage to people with certain pre-existing conditions. This is not the case with a Health Spending Account. It covers all pre-existing health conditions and has no age limit.

Improved employee satisfaction

The health spending account not only helps maintain a healthy, productive workforce, but also help in attracting and retaining top performers.

What’s the difference between an HSA and a Lifestyle Spending Account (LSA)?

With health care spending accounts (HCSAs), each plan member can use the plan to help cover the cost of eligible medical expenses, and this income is completely tax-free.

A Lifestyle Spending Account (LSA) on the other hand can pay for health-related items and services that are not considered medical expenses (as determined by the plan sponsor/employer). LSA withdrawals are also added to the plan member's taxable income.

Which expenses are allowed in an HSA?

As the Canada Revenue Agency states, Health Care Spending Accounts in Canada reimburse eligible medical expenses under the Income Tax Act, such as:

• Dental and medical expenses exceeding the traditional health plan coverage balance. For example, if you have your wisdom teeth removed for $2000, but your health plan only covers up to $1500 in dental coverage, the HSA can be used for the remaining $500.

• Eligible expenses that are not typically covered by traditional health care. For example, laser eye surgery might not be covered by your traditional health plan, but health care spending accounts can cover this.

• Deductibles and co-payments. For example, if your massage therapy costs $200, but your health insurance only covers up to 90%, you could use the HSA to cover the remaining $20.

From the list given by Canada Revenue Agency, HSAs cover all medical services received from a qualified medical practitioner, provided they are not covered by provincial health medicare plans and qualify as medical expenses under the Income Tax Act of Canada.

Below is a list of eligible expenses that an HSA would be able to cover. For a more detailed list, visit our page on Health Spending Account Eligible Expenses, or look at the Government of Canada's full list of expenses per the Income Tax Act of Canada.

1. Attendant Care Expenses (individuals who require a full-time attendant for their care and personal needs can file an HCSA claim. This includes housekeeping, food preparation, and laundry services).
2. Cochlear implants
3. Cancer treatments (provided by a licensed or public hospital/practitioner are covered, including expenses such as meals and overnight stays).
4. Dental care (non-cosmetic dental procedures are covered, such as braces). 
5. Diagnostic tests (expenses for tests like CT scans, MRI, ultrasounds, x-rays, cardiographs, and electrocardiograms).
6. Drugs (Medication prescribed by a medical practitioner, or prescriptions you fill the prescription at a pharmacy are eligible, but over-the-counter medicines, supplements, and vitamins are not).  
7. Catheters (Products such as catheter trays, catheters, and tubing).
8. Diabetic supplies
9. Prescription glasses / laser eye surgery
10. Therapists (Care from a registered message therapist, chiropractor, or physiotherapist).‍
11. Transportation or lift equipment (Equipment designed exclusively to help an impaired person access a building, or enter a vehicle).

For the above eligible expenses, as well as many others medical expense approved by the CRA under the Income Tax Act of Canada, HSA pays 100 percent of the claim, up to the prescribed annual limit.

However, an HSA doesn't cover some ineligible items such as:

• Health supplements and vitamins
• Over-the-counter or non prescription medications
• Cosmetic surgery
• Devices or equipment for exercise

Conclusion

Small business providers and sole proprietors can set up a HSA as an alternative to group health plan or to supplement it. Eligible medical expenses are paid in full up to the prescribed limit, and there is none of the co-payments and deductibles that group plans usually have.

The employer can write off the health spending account expenditure as business expenses and save on taxes, while member employees receive the employee benefits of their choice, 100 percent tax-free.

As mentioned by Canada Revenue Agency, HSAs are ideal for covering regular, routine medical expense and dental expenses, like dental care, prescriptions, new eyeglasses, and more. In other words, you will be able to get health and dental benefits with HSA. If you have any more questions, please feel free to contact a licensed insurance advisor at Dundas Life who can guide you with more information.

Frequently Asked Questions (FAQs)

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What is the difference between an Health Care Savings Account (HCSA) and a Lifestyle Spending Account (LSA)?

A Health Care Savings Account covers the cost of eligible medical expenses per the Income Tax Act on a tax-free basis. Meanwhile, an LSA can cover certain health-related expenses that are not medical expenses, as determined by the plan (e.g. a gym membership). LSA payouts are also added to the employee's taxable income.

How do I make an HSA Claim?

At Dundas Life, we make it easy to make HSA Claims using our partner technology portal. Upon account setup, each employee gets a login where they can upload their claims receipts for approval.

Can I use my HSA to pay off credit cards?

If you put your medical expenses on your credit card — whether to earn rewards or because you didn't have your medical savings credit card with you at the time — you can get a reimbursement as long as the medical expense was incurred while the HSA was open.
In fact, you can reimburse yourself from your HSA for medical balances you forgot to reimburse yourself years later — there is no time limit. However, you can't reimburse expenses incurred before you had the account. FSA reimbursements must occur during the fiscal year in which the expense was incurred. So, yes you can pay off your credit card balance using your HSA.