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.

So which option is the best for you and your employees? Here’s what you need to know about each one.

What is a Health Spending Account?

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 HSAs. Employees can use it to cover expenses listed as medical expenses under the Canadian Income Tax Act (CRA).

A 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

For a more detailed list of eligible expenses within a HSA, check out our blog post. 

How does a Health Spending Account 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. 

For example, Mark’s employer sets up a health spending account for his company. Mark’s company gives him $2,000 per year in his health spending account. He gets a $500 dental checkup, $300 for new glasses, and $200 for physiotherapy. Mark sends his receipts to his company’s HSA provider. A few days later, he gets $1,000 back, covering all his expenses with no tax. Since this money is from his employer, Mark saves on healthcare costs without paying out of pocket! 

Some key aspects of HSAs are: 

• All employees are eligible, regardless of their employment status. 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.
• Employers are the primary sponsors. In Canada, HSAs are primarily funded by employers – employees are not paying out of their own pockets.  
• Covers the whole family. Employees can claim expenses for themselves and all eligible dependents, including spouses, children, and parents. 
• HSA is an alternative to traditional health insurance in Canada. Smaller 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 an employer-funded benefit plan that provides employees with a designated sum of money to cover health and wellness-related expenses. It operates similarly to a bank account, where the employer allocates a specific amount of funds for each employee. Employees can then use these funds to pay for eligible wellness expenses and submit claims for reimbursement. 

Eligible expenses under a WSA can vary depending on the employer's plan but often include:

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

The primary purpose of a WSA is to promote employee wellness by providing financial support for activities and services that contribute to a healthy lifestyle. It's important to note that reimbursements from a WSA are typically considered taxable income for the employee.

‍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 predetermined 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

Let’s consider how Emma uses her wellness spending account. Emma’s company gives her $1,500 per year in a wellness spending account. She spends $800 on a gym membership, $200 on a meditation app, and $300 on a fitness tracker. Emma submits her receipts to the WSA provider. After reviewing her claim, the provider reimburses her the full $1,300 tax-free. Since WSAs cover health and wellness expenses, Emma gets to improve her fitness without paying extra from her own pocket!

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.
• WSA:  To help employees live healthier lives and make better lifestyle choices through a pre-determined sum for certain expenses.

‍Eligible Expenses

• HSA: Medical expenses, such as prescription drugs, dental services, attendant care, and other health-related expenses.
• WSA: Lifestyle enhancements and overall well-being 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 is a tax-free allowance, and contributions—whether from you or your employer—may be tax-deductible.
• WSA: It is a taxable benefit—WSA funds you use add to your taxable income, while employer contributions aren't tax-deductible.

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Pros and Cons of a Health Spending Account (HSA) and a Wellness Spending Account (WSA)

Both types of spending accounts have different advantages and disadvantages, so it's important to know which suits your employees the best.

Wellness Spending Account (WSA)

Health Spending Account (HSA)

Canadian vs American HSA and WSA

Despite the similarities between both countries, both Canada and the U.S.A have different rules surrounding health and wellness spending accounta.

Are HSAs the same in Canada and the United States?

A Canadian Health Spending Account is an employer-funded, tax-free reimbursement plan for medical expenses like health, dental, and vision care, with no personal contributions allowed and possible fund expiration. In contrast, the American HSA is an employee-owned, tax-advantaged savings account that stays with you if you change jobs, allows tax-free contributions, growth, and withdrawals, and rolls over yearly—acting as a long-term savings tool. However, it requires enrollment in a High-Deductible Health Plan (HDHP) to qualify.

Are WSAs the same in Canada and the United States?

In both countries, Wellness Spending Accounts (WSAs)—also called Lifestyle Spending Accounts (LSAs) in the U.S.—are employer-funded but taxable. Employers decide eligible expenses, but in both cases, they are not tax-free benefits. In Canada, WSAs typically expire at year-end if unused, but in the U.S. Expiration rules depend on employer policy, often following a use-it-or-lose-it model.

How to choose between a Health Spending Account and Wellness Spending Account?

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.

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 a Health Spending Account and a Wellness Spending Account?

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 Health Spending Accounts and Wellness Spending Accounts?

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 a Health Spending Account or Wellness Spending Account?

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 Health Spending Account or Wellness Spending Account 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 Health Spending Account or Wellness Spending Account 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.