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

A Health Spending Account or Health Care Spending Account is a simple and effective system for Canadian employers to provide tax-free health care and dental benefits to their employees and their family which is flexible and help save money.

According to the Canada Revenue Agency, the health benefits are fully tax-deductible and fully tax-free to employees. An employee can claim a variety of medical HSA eligible expenses and dental expenses without worrying about deductibles or co-pay. These claims are applicable to all family members, including children. This gives employees a sense of greater protection. These claims will be a reimbursement from the insurance company.

Setting up an Health Care Spending Account is easy, and there are no monthly premiums, co-pay, deductibles, 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 HSA for supplemental coverage.

This may be considered an investment by employers who want their staff to feel more protection. 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 a Health Spending Account Work?

An HSA is a good alternative system to a traditional health policy for both the employer and employees and has flexible spending options. Since there are no monthly premiums, it is a more cost effective way for the former which means saving more money. Moreover, it is easy to setup and manage. Employees, on the other hand, get a tax-free employee benefits program and don’t have to deal with deductibles and co-pays.  

Health Spending Accounts (HSA) is an employee benefit system that allows for the reimbursement of medical expenses not covered by a traditional health insurance plan.

HSAs are typically used to pay for medical expenses such as prescription drugs, doctor visits, dental care, and other types. So, if you are a patient, the HSA may come in handy with covering your hospital expenses. It makes no difference whether patients are treated by nurses, physicians, or others because they will always be covered.

The average annual out-of-pocket costs for prescriptions is $1,484. HSAs can also be used to pay for vision care (including contacts), hearing aids, chiropractic needs and other medical services. It can even be used for a massage.

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

• First, the employer defines coverage limits offered to employees' healthcare spending account 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 and all of its workers can benefit from it.

• 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 claim gets paid from the employer funding account

• The employer foots the bill and an 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 the claim amount within the permissible limit.

Once the claim gets approved, the employee receives a full refund of the medical expenses they incurred. 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.

Added flexibility

By adding an health spending accounts ( h.s.a. ) to  employee benefits packages, an employer can better address the varying needs of its member employees. With an HSA, your employees get reimbursements for a variety of medical 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 HSA to pay insurance deductibles and co-insurance payments. A deductible is the amount the policy holder must pay before their health insurance starts to kick in. A co-insurance payment, on the other hand, is the specified rate the policy holder pays for a private health services plan out of pocket.

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 an HSA that his employer has funded to the tune of $3,000 may decide that the funds will be used to:

• Cover prescription medicines for themselves
• Dental care for their children
• Pysiotherapy 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 accounts funds can get carried forward. So, the employer doesn’t have to pay anything if there are no claims. In other words, a health care spending account is a very convenient pay-as-you-go arrangement in which the employer gets to keep their cash till there is a claim.

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 extra strain on your finances. You may even find yourself in a situation where you have to reduce coverage to avoid a premium increase. In contrast, an HSA only charges you an administrative fee over and above the claim amount.

More control

As an employer in Canada, you get to select the maximum HSA 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 Care Spending Account. It covers all pre-existing health conditions and has no age limit.

Improved employee satisfaction

An HSA not only helps maintain a healthy, productive workforce, but also aides in attracting and retaining top performers due to it improving standard employee benefits packages, becoming an integral part an employee benefits program.

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Can I use my HSA to pay off credit cards?

If you put your medical expenses on your credit card balance for any reason — 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 and the funds were saved. So, yes you can pay off your credit card balance using your HSA.

HSAs can also be used to pay for a massage therapy, chiropractic needs, vision care, prescriptions and a lot of other items.

What’s the difference between a Health Care Spending Account (HCSA) and a Lifestyle Spending Account (LSA)?

Each plan member can use an HCSA to help cover the cost of eligible medical expenses tax-free. An LSA can pay for health-related items and services that are not considered medical expenses (as determined by the plan sponsor/employer). LSA withdrawals are 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 reimburses eligible expenses such as:  

• Dental and medical expenses exceeding the traditional health plan coverage balance

• Eligible expenses that are not typically covered by traditional health care

• Deductibles and co-payments

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.

The categories list includes physiotherapy, dental bracers, prescription drugs, prescription glasses, laser eye surgery, and massage therapy. In most cases, an HSA pays 100 percent of the claim, up to the prescribed annual limit.

In contrast, an HSA doesn't cover ineligible items such as health supplements, cosmetic surgery, and 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 accounts expenditure as business expenses and save tax, while member employees receive the employee benefits of their choice, 100 percent tax-free.

HSAs are ideal for covering regular, routine medical and dental expenses, like dental care, prescriptions, new eyeglasses, and more. If you have any more questions, please feel free to contact a licensed insurance advisor at Dundas Life that can guide you with more information.