Are you wondering if you can claim out-of-pocket medical expenses? We have good news. You may be able to claim them through a health spending account (HSA).
Although having access to an employer-sponsored health plan is a huge benefit, it does not cover all medical expenses. Furthermore, group plans have dollar limits, deductibles, and co-payments, which means you may end up footing the bill for a significant portion of your medical expenses each year.
That is where a health spending account — also known as a health care spending account (or HCSA for short) — can come in.
It pays for medical and dental expenses that are not covered by your group health plan or provincial plan. However, an HSA is beneficial not only to employees, but also to employers because the money contributed to it is tax deductible.
What is a Health Spending Account?
A Health Spending Account is a fixed-dollar-limit individual employee account that reimburses for a variety of health and dental expenses. If you or your dependents incur medical expenses that are not covered by your provincial health insurance plan or another group benefit plan and have an HSA, you may be able to claim them through it.
Each HSA is unique to its organization and not all employers in Canada offer it to its employees.
Here is how an HSA works:
- Your employer (also known as the plan sponsor) decides the dollar limit of your HSA for the year. Depending on the plan, it may be funded by employer contributions alone or by both employer and your contributions. However, employee contributions come from after-tax dollars, meaning you will not receive any tax benefit for adding money to your HSA.
- You submit a claim for health and dental expenses to HSA for reimbursement.
- The claim is processed as per the rules and terms selected by your employer.
- You can continue to submit claims for eligible expenses until your account’s balance is zero.
Despite the word "account" in its name, an HSA functions similarly to a traditional health and dental plan. However, its scope of coverage is much broader than that of traditional plans, giving plan members more flexibility.
You can use your HSA to pay for health-care expenses not covered by your standard or provincial plan, such as expenses for sight or hearing guide dogs, dental services not covered by an existing dental plan (e.g., orthodontics, caps, bridges, and crowns), and certain cosmetic surgeries.
A standard health insurance benefit plan's deductibles and co-insurance may be covered by an HSA. For example, if your current standard plan reimburses 75% of an eligible expense, you may be able to get reimbursed for the remaining 25% or a portion of it through the HSA.
You may also use it to cover eligible expenses in excess of your standard plan maximums. For example, if your existing standard plan reimburses up to $600 a year for massage treatment and you want to continue the treatment after exhausting this limit, you may claim the additional expenses through the HSA.
List of HCSA eligible expenses
The Canada Revenue Agency (CRA) decides what health expenses can and cannot be claimed against an HCSA. While not exhaustive or exhaustive, the list below includes common eligible expenses.
Attendant Care Expenses
Individuals who require a full-time attendant for their care and personal needs due to a physical or mental impairment can file an HCSA claim for attendant care expenses.
Housekeeping, food preparation, and laundry services are all eligible expenses. To be eligible for reimbursement, your physician must certify in writing that you will most likely require such care in the long run, and the attendant cannot be your common-law partner or spouse.
You can claim cochlear implants without a proof of prescription.
HCSA covers cancer treatments provided by a licensed or public hospital or a licensed medical practitioner. Cancer treatments in Canada and outside it are covered. HCSA pays for expenses such as the cost of an overnight stay and meals.
Non-cosmetic dental procedures undergone by you in a dental office are covered.
HCSA reimburses the cost of medical tests, like CT scans, MRI, ultrasounds, x-rays, cardiographs, and electrocardiograms.
HCSA pays for drugs if:
- a medical practitioner has prescribed them
- you fill the prescription at a pharmacy.
You can also claim reimbursement for naturopathic medicines if a physician has asked you to take them. However, over-the-counter medicines (like supplements or vitamins) are not covered, even if prescribed by a physician. The only exception is Vitamin B12.
Drugs dispensed by a physician are covered, but only if you received them as part of your medical treatment.
For drugs bought outside Canada, you are eligible for reimbursement only if they are approved for use in Canada.
Products that you buy to manage incontinence caused by injury, illness, or affliction are covered. The list includes catheter trays, catheters, and tubing, among others.
The list of health spending account eligible expenses includes diabetic supplies such as glucose watch, blood glucose monitor, lancets and batteries.
If you receive health care services from the hands of a qualified health care professional, such as a registered message therapist, chiropractor, and physiotherapist, you can claim the expenses through HSCA.
Transportation or lift equipment (power-operated)
This includes equipment designed exclusively to help an impaired person access different parts of a building, get in or out of a vehicle, or put a wheelchair in a vehicle.
Note: The list of eligible expenses is subject to change. Visit the CRA’s website to find out the most current list.
What is not eligible?
Typically, the HSA does not cover the following expenses:
- diaper services
- birth control devices (non-prescription)
- fitness or athletic club fees
- organic food
- activity trackers like Apple Watch, Garmin, Fitbit, etc.
- over-the-counter medications (e.g. aspirin, antacids, laxatives, etc.), supplements, vitamins (except VitaminB12), even if prescribed by a doctor
- cost of cosmetic procedures. (Certain cosmetic procedures, like botulinum injections and liposuction, may be eligible if deemed important for reconstructive or medical purposes.)
Why offer an HSA?
An HSA enables employers to provide health benefits to their employees at a low cost. Employer contributions to HSAs are tax-free because they are considered business expenses.
In other words, an HSA allows your employees to use pre-tax corporate dollars to pay for medical expenses that they would otherwise have to pay out of pocket. Furthermore, the scope of coverage for an HSA is much broader than that of traditional plans, giving your employees more flexibility.
Employers can provide an HSA as a stand-alone group plan to their employees. It can also be included as part of a group benefits package.
Employees' ability to contribute to HSAs is dependent on how the plan is implemented. HSAs created as part of a group benefits plan can be funded by both the employer and the employee. Employees, on the other hand, receive no tax benefit from their contributions because they are made with after-tax dollars.
- Funded entirely by the employer or the plan sponsor.
- Dollar limits for each class of employees for the year are determined by the employer.
- All the members of a particular class have the same dollar limit. For example, a $1,200 limit for the “Management” Class (i.e. all the Managers in the company) and a $600 limit for the “Non-Management” Class.
- A valid plan must conform to private health services plan (PHSP) rules in the Income Tax Act.
HSA as a group plan
- Can be funded by both the employer and the employee, but only the former gets the tax benefit.
- If you incur an eligible medical expense, you must first submit it through your group plan. Any expense that is not included in the group plan or that exceeds the group plan’s dollar limit can then be claimed through your HSA.
Unused HSA Funds
Three options are available for handling unused funds at the year end:
- The employer may elect to roll over any unused funds into the following year's HSA.
- If the employer decides not to roll over the unused credits, the employee will have to forfeit the funds, which will be duly returned to the employer.
- If the rollover of unused funds is allowed, the employer can set the maximum amount that can be carried over. They can also add the condition that the employee will have to forfeit any unused funds the next year. HSA credits cannot be rolled over perpetually.
- Employers can write off their contributions to HSA and administrative fees as business expenses.
- Employees receive reimbursement tax-free.
Is an HSA right for me?
A health spending account helps employees cover those medical expenses that are not covered by their group or provincial health plan. Employers can offer their employees a HSA as a stand-alone benefit or part of the group health policy. Contributions made by employers are tax-deductible while employees receive cash benefits tax-free.
Looking to offer an HSA plan for your employees? Reach out to a Dundas Life health benefits specialist today.