A Health Spending Account (HSA) is beneficial for both the employer and employees. It allows small business owners and sole proprietors to offer a flexible health plan while saving tax. Employees, on the other hand, can pay for expenses not covered by their provincial medicare plans with non-taxable dollars, making use of the taxable benefit.
Continue reading to find out what an HSA is, how it works, and its main employee health benefits.
What is a Health Spending Account (HSA)?
A Health Spending Account or Health Care Spending Account is a simple and effective way for Canadian employers to provide tax-free health and dental benefits to their employees and their families. 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 expenses and dental expenses without worrying about deductibles or co-pay.
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.
A Health Care Spending Account is also referred as Health Care Expenses Account, Private Health Spending Plan, Private Health Services Plan, Cost Plus, Lifestyle Spending Account or Health Care Spending Account.
How Does a Health Spending Account Work?
AN HSA is a good alternative to a traditional health policy for both the employer and employees. Since there are no monthly premiums, it is a more cost effective way for the former. 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.
Here’s an overview of how a Health Care Spending Account works:
- First, the employer defines the coverage limits offered to the employees by 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 a specific amount and all of its workers can benefit from it.
- The employee pays the expenses out of pocket at the time of service.
- Afterward, the employee can file a claim and receive reimbursements tax-free.
- The claim gets paid from the employer funding account
- The employer foots the bill and an additional 8% 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 can get reimbursed for 100 percent of their claim, up to their annual non taxable benefit limit.
- The employer doesn’t have to pay any monthly premiums — only the 8% fee.
Let’s consider an example. Suppose you are a business owner and wants to start a HSA for each of your eight full-time employees. You have agreed to fund each worker’s HSA with $3,000.
An employer consults 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 latter will check whether the claim is legitimate and the claim amount within the permissible limit.
Once the claim gets approved, the employee fill receive a full refund of the medical expenses they incurred. This money is completely non-taxable. And you, the employer, can write it off as a business expense and save tax.
What are the benefits of an HSA?
Here are the main advantages of setting up a HSA.
By adding an HSA to the employee benefits package an employer can better address the varying needs of its employees. With an HSA, your employees can 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, etc. 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 the money in it will be 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 himself, psychotherapy for his wife, and dental care for his children.
A Health Care Spending Account 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 an 8% fee. There’s no maintenance fee, setup fee, or monthly premium.
When the plan year ends, the funds might get carried forward. So, the employer doesn’t have to pay anything if there are no claims. In other words, this 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 plan, the premiums may go up every year.If you offer group health insurance for free as a part of the employee benefits package, the annual increase in premiums may put extra strain on your company’s finances. You may find yourself in a situation where you have to reduce the coverage to avoid a premium increase. In contrast, an HSA only charges you an 8% administrative fee over and above the claim amount.
As an employer, you get to select the maximum benefit 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 a employee benefits program.
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
- Eligible expenses that are not typically covered by traditional health care
- Deductibles and co-payments
Generally speaking, 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 IncomeTax Act of Canada. These include physiotherapy, dental bracers, prescription drugs, prescription glasses, laser eye surgery, and massage therapy. An HSA pays100 percent of the claim, up to the prescribed annual limit.
Small business owners 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 expenditure as business expenses and save tax, while the employees receive the employee benefits 100 percent tax-free. HSAs are ideal for covering regular, routine medical and dental expenses, like dental care, prescription drugs, new eyeglasses, and more.