What is an HSA?

An HSA is a tax-friendly account that helps businesses cover employees’ various health and dental expenses, making these costs a legitimate business expense. Through an HSA, the company reimburses employees for their health-related expenses based on an agreed-upon structure. The Canadian Income Tax Act regulates HSAs, which go by different names, such as Health Savings Account Canada, Private Health Spending Plans (PHSP), Health Care Spending Accounts (HCSA), or Health Care Expense Accounts. In Canada, an HSA typically refers to a Health Spending Account, while the United States generally classifies an HSA as a Health Savings account. People often use these terms interchangeably.

Businesses can treat HSA contributions as a regular expense, similar to office supplies or business meals, making them tax-deductible and helping reduce taxable income. Employees get tax-free funds for qualifying health and dental expenses, excluding these amounts from their income.

Who is eligible?

The health spending account is available to incorporated and unincorporated businesses, such as partnerships and sole proprietors, but with varying restrictions. The plan covers the health expenses of the employee, spouse, and dependants. Incorporated businesses can offer the plan to all employees or specific groups. Employers have the flexibility to set spending limits based on employee roles. Only employees actively participating in the business can receive the plan and its benefits, which excludes shareholders. Unincorporated businesses can also qualify for an HSA with tighter spending limits and eligibility restrictions. Individuals must be actively engaged in the business and meet specific income criteria.

The pros and cons of providing HSA coverage

Understanding the pros and cons of HSAs can help organizations determine if an HSA suits their employee benefits package. Below are some pros of providing Health Spending Account coverage:

• Tax efficiency: Contributions to HSAs are tax-deductible for businesses, lowering taxable income while providing a valuable benefit.
• Flexibility: HSAs allow businesses to set a spending limit, and employees can use the funds for eligible health and dental expenses.
• Attractive to employees: HSAs can help attract and retain employees by enhancing benefits packages.
• Cost control: Businesses can predict and control healthcare expenses by capping contributions and aligning healthcare spending with the company budget.
• No premiums: HSAs operate without the fixed premiums of traditional health insurance, making it more adaptable for companies with fluctuating employee numbers.
• Encourages preventive care: By providing employees with funds for health expenses, HSAs encourage proactive health and wellness management, leading to better health outcomes and reducing long-term healthcare costs for employees and your company.

Below are some cons of offering HSA coverage:

• Limited to specific expenses: Employees can only use HSA funds for health and dental expenses, which can reduce the perceived value for some employees.
• No coverage of severe illnesses: HSAs do not cover catastrophic health events or serious illnesses, so businesses may need to pair them with other insurance plans.
• Requires administration: Although HSAs are flexible, they generally require administrative management by a third party, including processing employee claims and reimbursements.
• Unused funds: Depending on the plan’s terms, the funds might go to waste if employees do not use the total amount allocated to their HSA.
• Different employee needs: Some employees might not fully benefit from the HSA, potentially leading to dissatisfaction.

How employers contribute funds to an HSA

Employers can contribute funds to HSAs in several ways, with flexibility based on company preferences and budget. Some employers allocate a fixed annual amount per employee, while others choose monthly or quarterly contributions to spread out costs throughout the year. Employers might also customize contributions based on employee roles, tenure, or needs, setting different limits throughout the organization. Some companies allow unused HSA funds to roll over to the following year, increasing flexibility for employees, while others reset the account annually, depending on the plan’s structure.

Understanding HSA contribution limits

HSAs have contribution limits that change according to the business type and employee classifications. Employers can set flexible spending limits for incorporated businesses for different employee groups. For example, they might give executives a $15,000 limit, senior management $5,000, and full-time employees $1,500. To maintain fairness and avoid classifying HSAs as taxable shareholder benefits, companies often recommend keeping the highest limit within ten times the lowest—if executives receive $15,000, other groups would have a minimum of $1,500.

Contribution limits are often more restrictive for unincorporated businesses like partnerships and sole proprietors. The annual deduction limits are generally $1,500 for each proprietor, spouse, and dependants over 18 and $750 for dependants under 18. These limits can ensure that contributions remain reasonable and align with the business’s operational scope.

Key aspects of HSA contributions

Some key aspects of HSA contributions empower employers to enhance their benefits packages and support their employees’ health and wellness needs:

Employer funding

In Canada, only employers contribute to Health Spending Accounts. Employees do not make contributions, making HSAs a fully employer-funded benefit.

Contribution limits

Employers set contribution limits, which vary based on employee roles or levels within the organization. Incorporated businesses have more flexibility in setting these limits, while unincorporated companies have more restrictions.

Tax benefits

Contributions made by employers are tax-deductible, just like any other business expense, reducing the company’s taxable income. Employees receive funds tax-free, eliminating paying income tax on the amounts used for eligible costs.

Flexibility in spending

HSAs help employees with eligible health and dental expenses. Employers can set different spending limits for various employee categories, adding flexibility to the benefits package.

Unused funds

Depending on the plan’s terms, unused funds in an HSA can either roll over to the next year or be forfeited. Businesses can choose the rollover option to offer their employees better flexibility.

Employee eligibility

Employees actively involved in the business can benefit from a company’s HSA, whereas shareholders are not eligible.

Plan administration

Managing an HSA generally involves administrative tasks, such as processing claims and tracking contributions, which businesses can handle or outsource.

Information to share with your staff

The following information can help your staff maximize their HSA Canada benefits and understand how to manage their health expenses:

Be transparent

Explain what an HSA is and how it works. Emphasize that your company is funding the benefit to cover eligible health and dental expenses.

Contribution limits

Inform employees of your contribution limits, which may vary for different employee statuses or roles.

Eligible expenses

Provide a list of expenses the HSA covers, including examples to help employees understand the qualifications.

Process and documentation

Describe the process for accessing and using HSA funds, including how to submit claims and any necessary documentation the employee may need to submit.

Administration and support

Provide contact information for who is responsible for administering the HSA and where to get help with questions or issues.

FAQs about HSAs and HSA limits

Here are some answers to frequently asked questions about this topic:

What are the contribution limits for HSAs in Canada?

Employers in incorporated businesses have flexibility in setting contribution limits, often based on employee roles or classes. Unincorporated businesses typically have stricter limits: $1,500 annually for each proprietor, spouse, and dependants over 18 and $750 for dependants under 18.

Are HSA contributions tax-deductible?

Yes, employer contributions to an HSA are tax-deductible as a business expense, reducing the company’s taxable income. For employees, the funds used for eligible health and dental expenses are tax-free and do not count as part of their income.

Can I set different HSA contribution limits for various employee groups?

Employers can set contribution limits based on employee groups, such as executives, senior management, or full-time staff. The Canada Revenue Agency (CRA) recommends that the highest contribution limit not exceed ten times the lowest to avoid unfairness.

What kind of expenses does an HSA cover?

Employees can use HSAs to cover health-related expenses, such as dental care, vision care, prescription medications, physiotherapy, and medical equipment. The CRA lists eligible medical expenses for tax purposes, which typically guides HSA claims.