A Health Spending Account (“HSA”) is a variation of a traditional group benefit plan. It provides coverage for a wide range of health and medical-related expenses on a “pay as you go” premise.

HSAs are administered in accordance with Canada Revenue Agency guidelines and provide a cost-effective way for an incorporated business to provide health and dental benefits to their employees. Furthermore, for business owners, the HSA turns your (& your dependents) after-tax, personal medical expenses into eligible business deductions. Being able to use corporate dollars to pay for personal medical expenses makes the HSA an incredibly valuable tax-planning tool for business owners. Also, it provides immense control when it comes to offering extended health and dental coverage to employees.

Click here for a list of some of the expenses allowed under a HSA

What are the costs?

1. 10% administration fee on all claims (example given below).
2. No annual premiums, deductibles, or hidden fees.
3. No set-up fees.

How does it work? See the example below:

1. The employee pays their $500.00 dentist invoice on their personal debit or credit card.
2. The employee goes online to their HSA portal and submits a copy of the $500 dentist invoice.
3. The business submits payment for $552.50 ($500 dental bill + 10% admin fee + 5% GST on the admin fee) to the HSA provider – fully tax-deductible.
4. The employee receives a tax-free direct deposit from the HSA provider for $500.
5. The business has a deductible expense for the full amount submitted and the employee faces no tax implications or out of pocket costs.

End result:

Scenarios for a Health Spending Account:

1. Let’s say a business consists of the owner and 4 employees. The owner wants to provide an extended health plan for the employees but has some concerns about the cost of premiums with a traditional group benefit plan.  To maintain complete control, the owner implements a HSA, providing each of the employees with $1,000 to use over the course of the year.  It is entirely up to the employee how they spend their “extended health and dental” funds. For instance, they can go for massages, the dentist, and the chiropractor.  Moreover, the owner knows exactly what this is going to cost for the year ($1000 + admin fees x 4) and the employees have some health & dental flexibility.
2. Under a different scenario, let’s assume a business consists of just one individual. This could be the owner, who is actively involved in the business as an owner-operator and receives T4 income from the business.  They have a spouse and young children who are not covered under any other benefit plan.  When setting up the HSA, the spouse and children can get added to the plan as dependents of the owner.  This allows the business, through the HSA, to deduct the eligible medical expenses incurred by the owner, the spouse and the children.
3. The HSA also works well with traditional, premium-paying group benefit plans.  For example, if a business owner has coverage under a group benefit plan that their spouse belongs to, there are commonly co-pays and deductibles. This is where the plan member might have to pay 20% of a massage invoice out-of-pocket. As a result, the business owner can set up a HSA for their business and expense the out-of-pocket portion.

What to do next?

Speak to us about setting up a HSA for your business. Contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.  The setup process involves a few basic forms, completed electronically in a matter of minutes.

DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.