What Business Owners Need to Know About Health Spending Accounts

Posted by Bristol Capital Management 21-04-2021

Employers are always looking for an edge when it comes to attracting new talent and offering comprehensive employee benefits is one of the best ways to do so. Health Spending Accounts, also referred to as Private Health Services Plans, offer both business owners and their employees a flexible health benefits solution that can either compliment or completely replace traditional health plans.

What You Need to Know

How It Works

A Health Spending Account (HSA) is an account with a predetermined dollar amount that employees can use to cover health expenses that are not covered by their traditional health plan. The amount in the account is predetermined at the beginning of the year by the plan sponsor (employer). The employees may apply to be reimbursed for eligible medical expenses both for themselves and their dependents.

What It Covers

Eligible expenses are determined by the CRA. The general rule is you can claim anything that can be claimed as a medical expense by the Income Tax Act.  An HSA is available to cover unpaid balances that are not covered by an employee’s health plan, governments plans, or a spousal plan. For example, the HSA covers services such as vision care, dental care, and drug expenses that are not otherwise covered (such as fertility drugs).

Tax Implications

Businesses may deduct HSA payments made on behalf of employees and their dependents.   Benefits are received tax free by the employees.  There are different rules for HSAs for incorporated and unincorporated businesses:

  • Incorporated Businesses
  • The Income Tax Act does not place a limit on the amount of deductions allowed for HSA premiums in a corporation.
  • Payments for medical expenses may only be received by the shareholder as an employee.
  • Shareholder must be actively engaged in business activities.
  • Benefits must be reasonable and be consistent with what would be offered to an arm’s length employee.
  • Sole Proprietorships and Partnerships

Expenses may be deductible if:

  • Individual is actively engaged in business.
  • In current or preceding tax year, more than 50% of income is from the business or individual’s income is less than $10,000 from other sources.
  • Health Spending Account may not be accepted by CRA if the self-employed individual does not have at least one arm’s length employee.

The Bottom Line

Health Spending Accounts are a useful and beneficial tool that can be used by business owners to supplement their employee’s health coverage. Health Spending Accounts can help business owners budget their yearly expense more effectively as the cost of the plan is determined by the business owner, rather than traditional health benefits which have increasing yearly premiums based on claims. It is important for business owners to pay close attention to the CRA rules surrounding HSAs to ensure that they are eligible for the deductions that are offered to plan sponsors.

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