1. What is a Health Spending Account?

A Health Spending Account (HSA) is a Private Health Services Plan (PHSP) and is an alternative to traditional health insurance. It’s a Canadian tax-free vehicle for financing the health care services for employees and their family members. It was introduced in 1989 by Canada Revenue Agency (CRA IT-339R2) and is now used by thousands of small business owners across Canada. It has become the most popular form of health spending accounts in Canada.

A PHSP enables small business owners to deduct 100% of their family health and dental expenses without paying standard premiums associated with traditional health insurance plans. It is an effective tool to cut your taxes and reduce your medical costs which can create savings of more than 30%. If your company has many employees, a PHSP is a tool for attracting and retaining talent as it’s 100% tax free to employees.

2. Who qualifies?

YES: You own an incorporated businesses. The CRA states that businesses with as few as one employee can be eligible. Note: You are not eligible if you are only a shareholder of the company and not earning a salary.

YES: You and your employee(s) are eligible even if your business is not incorporated, but only if there is at least one arm’s-length employee.   

NO: Your business is not incorporated and is the sole proprietor with no employees. Note: Individuals in this bucket should get incorporated.

3. Do I need to be in good health to participate?

No you don’t. Past or current health conditions do not affect your ability to enrol in the plan.

4. Is there an age limit?

No there isn’t. As long as employee is still actively working for the company.

5. Are my dependants covered?

Yes they are. Any member of your household that is related by blood, marriage or adoption is covered.

6. How will I save money?

• Tax saving: Health and Dental expenses are 100% deductible for your business and are tax-free for the employee;
• No premiums or deductibles: Avoiding high premiums and deductibles associated with traditional health insurance will reduce cost for your business; and
• Broader coverage: Save money by not paying out of pocket for comprehensive range of coverage that is often excluded by traditional benefits plans.

With this HSA, you are able to deduct many more health costs as a business expenses. This saves you much more money, as “pre-tax” dollars are being used. A typical Canadian family spends about $3500 on healthcare each year. With annual taxable income of $100,000 and a $3,500 health expense could mean an estimated tax savings of $2400+. Ask your accountant about how much you can save annually using a HSA.

7. What are other benefits for signing up?

• Works with other plans: You can deduct any eligible expenses not covered by your spouse’s plan or submit premiums from insured plans to your HSA to make them deductible and reduce taxes;
• Flexibility: You are able to allocate benefit dollars to where they are needed most; and
• Simplicity:  Traditional insurance benefit plans are complex and costly. HSA is an easy way to manage your Health and Dental costs in addition to paying only for what you use.

8. Why is HSA better than a traditional insurance plan?

Here is why you should feel confident choosing a HSA to pay for out of pocket medical expenses:

• Have 100% coverage and access to a wider range of eligible expenses;
• Will not restrict or limit benefits due to a pre-existing medical condition;
• Avoid a premium or a premium creep due to usage or age factors;
• Pay for the expenses you incur, eliminating a situation where you have paid into a program that you did not use;
• No deductibles;
• You are not restricted by co-insurance; and
• No limits for the number of visits and treatments.

9. What is the deduction limit and who sets the limits?

In order for the plan to be valid a “reasonable” limit needs to be set. Industry standard is at $15,000 per year for an incorporated business owner. If the business has additional employee, the business owner is able to determine specific amounts for each classification of employee (management, full time, etc). 

For example, Executives might receive $15,000, Senior Management $5,000 and Full Time employees $2,000.  A general rule of thumb, staying in line with CRA’s criteria for “reasonable” limits, is to ensure the highest limit within a HSA does not exceed ten times that of the lowest limit.  Reason being is that a Health Spending Account cannot be tilted excessively in favour of the executive class or the HSA could be deemed a shareholder benefit.  A shareholder benefit is taxable and would disqualify the HSA.

10. Is an HSA effective for incorporated consultants/ contractors?

In our opinion this particular segment is overlooked by traditional health insurance carriers as it’s expensive to insure. One can argue that HSA is most effective for a one person business as you and your family would benefit from a 100% tax deduction for your family’s medical and dental benefits. Additional key advantages are:

• Reduce your business and personal taxes
• Get comprehensive medical coverage of all the routine expenses
• Pay less for an insured health and dental coverage than you do today in premiums
• Ability to supplement plans held by a spouse who is employed outside your business