Health Spending Account vs Wellness Spending Account: The Difference Explained

When it comes to fringe employee benefits, two terms that are often used interchangeably are health spending account and wellness spending account.

While both spending accounts serve important roles in employee benefits, they are two entirely different financial products with distinct purposes: Health Spending Accounts focus on medical necessities, whereas Wellness Spending Accounts promote preventive health and wellness initiatives.

Here’s what you need to know about each one.

What is a Health Spending Account?

A health spending account (HSA) is a dedicated fund for employees to cover medical expenses not included in their provincial health insurance or employer-provided group insurance plan. The Canadian Revenue Agency regulates Health Spending Accounts and determines which expenses are eligible for HSA. Employees can use it to cover expenses listed as medical expenses under the Canadian Income Tax Act (CRA).

HSA pays for a wide range of health-related services, devices, and facilities; these include, but are not limited to:

• Prescription medications, like insulin, vitamin B12, etc.
• Health practitioners, including psychologists, chiropractors, and registered massage therapists
• Hospitals
• Assistance devices & equipment, such as hearing aids, CPAP machines, and prescribed orthopedics
• Dental care, including diagnostic, preventive, and restorative (but not cosmetic) dental procedures
• Additional expenses, like radiological procedures, laser eye surgery, and rehabilitative therapy

Check out our blog post for a complete list of eligible expenses.

How does an HSA work?

Employees initially cover their health and dental expenses upfront and subsequently file a claim for reimbursement via the HSA. The employer processes the claim using company funds. After that, the HSA provider transfers the reimbursement directly into the employee’s bank account. 

Some key aspects of HSAs are: 

• All employees are eligible. Think of an HSA as a tax-effective employee account. The employer puts a certain amount in HSA, and all employees can benefit from this non-cash value benefit. Unlike some other fringe benefits, all employees are eligible for HSA, regardless of their employment status. 
• Employers are the primary sponsors. In Canada, HSAs are primarily funded by employers.  
• Contributions are 100% tax deductible. The money that a corporation contributes to HSA is 100% tax deductible, while employees receive their HRA funds tax-free to reimburse eligible medical expenses. 
• Covers the whole family. Employees can claim expenses for themselves and all eligible dependents, including spouses, children, and parents. 
• No coverage limit. HSAs don’t have coverage limits, nor do they have service maximums or deductibles. 
• HSA is an alternative to traditional health insurance in Canada. Small-scale employers can use HSA to provide health benefits to their employees and write them off as business expenses. 

What is a Wellness Spending Account?

A wellness spending account (WSA) is a benefit plan funded by the employer, providing employees with a designated sum of money to cover health and wellness-related expenses. A WSA works like a bank account. The employer puts a designated sum in the wellness spending account and the employer can submit claims for reimbursements.

Eligible wellness expenses may vary by plan, but the list could include:

• Club or gym memberships
• Nutritional counseling
• Marriage counseling
• Personal training
• Smoking cessation programs
• Child care or elder care
• Cosmetic treatments
• Online talk therapy
• Development courses
• Fitness classes

How Does a Wellness Spending Account work?

Wellness spending accounts are designed to support personal wellness and health-related expenses for employees while limiting expenditures for the employer through a pre-determined allowance. 

Here’s how it works: 

• The employer sets up a WSA for each of the eligible employees and funds them
• The employer determines which expenses are eligible for reimbursement (generally, employers consult their employees before preparing the list)
• Employees submit a claim for reimbursement after paying out-of-pocket for an eligible expense
• The plan provider reimburses you after going through the claim request
• Unused funds in a WSA usually revert to the employer or after an employer leaves the company

Health spending account vs Wellness spending account

While both health spending accounts and wellness spending accounts aim to create a healthy workforce by promoting employee wellness, they differ significantly in various aspects.

The Health Spending Account myHSA is primarily designed to cover eligible medical expenses not addressed by traditional insurance plans, providing financial assistance for essential medical treatments. In contrast, the Wellness Spending Account myWSA focuses on promoting overall well-being through preventive measures and lifestyle enhancements, emphasizing proactive wellness spending.

Purpose 

HSA: To cover eligible medical expenses that are not included in provincial or group health plans. An HSA can serve as either a stand-alone alternative to conventional health insurance or as a supplementary “top-up" plan to enhance existing coverage.  

WSA:  To help employees live healthier lives and make better lifestyle choices by providing them with a pre-determined sum for eligible wellness expenses. 

Eligible Expenses

HSA: It covers medical expenses. Eligible expenses include prescription drugs, dental services, attendant care, and other health-related expenses.

WSA: It covers expenses related to lifestyle enhancements and overall well-being. Eligible expenses may include gym memberships, yoga retreats, nutritional counseling and products, etc. 

Preventive or Reactive

HSA: It takes a responsive approach to healthcare, allowing employees to address health concerns and medical needs as they occur.

WSA: Primarily active, encouraging employees to live healthier lives and adopt active lifestyles.

Tax Implications

HSA: It’s a tax-free allowance. Contributions to an HSA made by you or your employer may be claimed as tax deductions. 

WSA: It is a taxable benefit. WSA funds used by you contribute to your annual taxable income. For employers, contributions to a WSA plan are not tax deductible. 

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What are the Main Benefits of Health Spending Accounts?

• HSA offers tax-free allowance. You don’t have to pay taxes on reimbursements received through it. 
• The money in your HSA has no expiration date. Unused funds roll over from one year to the next. 
• HSA provides greater flexibility to employees. They can use the funds for virtually any healthcare expense.
• HSAs are portable. You can keep your HSA even if you change jobs or retire. 
• HSA helps you cover expenses not included in provincial health insurance or group health insurance. This ensures you are able to access quality health care without worrying about how you’ll pay for it.

What are the main benefits of a WSA?

• WSA encourages employees to take charge of their health and wellness by providing funds for a range of activities. This promotes a healthy lifestyle by supporting various wellness activities.
• WSA helps reduce stress in the workplace, which often translates into higher workplace productivity.
• WSA helps reduce absenteeism and boost employee morale and motivation.
• WSA helps employers to attract and retain talent.

How to choose between HSA and WSA?

When choosing between a health spending account and wellness spending account, employers may want to consider the following things:

• Tax Status: While both spending accounts are cost-controlled, only HSAs are 100% deductible as a business expense.
• Your employees’ unique needs: Your employees will ultimately use the spending account, so it makes sense to offer them the benefits they are likely to use the most.
• Customization: As an employer, you can completely customize the list of eligible items in a wellness spending account. HSAs, in contrast, cover medical expenses not included in provincial or group health insurance. WSAs promote healthy lifestyles by encouraging proactive lifestyle choices such as fitness classes and nutritional counseling, fostering overall well-being.

Of course, it doesn’t always have to be a health spending account vs. a wellness spending account. You can offer to choose both if you want to since a robust fringe benefits package is worth the cost.

Time and again, studies have shown that offering a strong employee benefits program is a key factor in attracting and retaining top talent, boosting employee morale and productivity, and enhancing overall employee wellbeing.

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Conclusion

HSA is a tax-advantaged benefit that helps employees pay for various health and dental expenses. WSA, on the other hand, helps employees with personal wellness-related expenses. Both help employers attract and retain top talent, improve employee morale and motivation, and boost productivity. Depending on your company’s needs and budget, you can offer one or the other or both to your employees. 

Looking to setup an HSA or WSA for your company? Book a call with a Dundas Life licensed advisor today. We'll go through the benefits and find the right plan(s) for you.

Frequently Asked Questions (FAQs)

Can I have both an HSA and a WSA?

You can maintain both a Health Spending Account (HSA) and a Wellness Spending Account (WSA) simultaneously. These accounts serve distinct purposes and cover different eligible expenses, enabling you to maximize your health-related benefits according to your employer’s plan offerings. 

What are the tax implications of HSAs and WSAs?

HSA is a tax-free allowance. Contributions made to it by you or your employer may be claimed as tax deductions. 

In contrast, WSA is a taxable benefit for employees. Any WSA funds used by you will contribute to your yearly salary. 

Are there any restrictions on who can have an HSA or WSA?

All employees are eligible for a health spending account myHSA, regardless of whether they are employed full-time or part-time. As far as a wellness spending account myWSA account is concerned, you may be eligible for it if your company offers it. The employer determines the eligibility and other details, such as available expenses and annual limits. 

Can I use my HSA or WSA for my family members’ expenses?

Typically, HSA and WSA benefits are extended to your spouse, children, and parents. 

What happens to unused funds in my HSA or WSA at the end of the year?

Unused HSA at the end of a year rolls over to the next year. You can use them to pay for eligible expenses in the future. The same is true for WSA. Unused money typically rolls over to the next year and can be used to pay for eligible expenses in the future.