Downsides of Health Spending Accounts in Canada: What to Know Before Signing Up

By Frontier Team•February 10, 2026•4 min read

We think a Health Spending Account is the best way for most Canadian small businesses to handle health benefits. But we'd be doing you a disservice if we only talked about the good stuff. HSAs have real limitations, and you should know about them before you sign up. Here's an honest rundown of the downsides.

An HSA Is Not Insurance

This is the biggest one. An HSA reimburses you for everyday medical expenses like dental visits, prescriptions, and physiotherapy. It does not protect you against catastrophic events. If someone on your team faces a $50,000 cancer drug or a major hospital stay, an HSA won't cover it.

If you need protection against large, unpredictable medical costs, you may want traditional insurance alongside your HSA. Many businesses pair a basic insurance plan for catastrophic coverage with an HSA for day-to-day expenses.

You Pay Upfront, Then Get Reimbursed

With an HSA, employees pay for their medical expense out of pocket first, then submit a receipt for reimbursement. That means they need cash on hand to cover the cost. With Frontier Health, reimbursement happens within 24-48 hours by e-transfer, but there is still a brief gap between paying and getting your money back.

Only CRA-Eligible Expenses Qualify

You can't use your HSA for anything you want. Only expenses on the CRA's eligible medical expenses list qualify. That means gym memberships, cosmetic surgery, and general vitamins are not covered. The list is still very broad — dental, vision, prescriptions, mental health, physiotherapy, and hundreds more — but it's not unlimited.

Sole Proprietors Without Employees Can't Use One

If you're an unincorporated sole proprietor with no arm's-length employees, you don't qualify for an HSA. You need to either be incorporated or have at least one arm's-length employee. If it's just you and you haven't incorporated, an HSA isn't available to you yet.

Quebec Treats HSA Benefits as Taxable

In every province except Quebec, HSA reimbursements are completely tax-free for employees. In Quebec, HSA benefits are treated as a taxable benefit at the provincial level. The federal tax treatment is still favourable, but Quebec employees will see some provincial tax on their reimbursements.

Your Budget Has a Fixed Limit

Once your allocated annual budget runs out, that's it until the next benefit year. There's no insurance pool to fall back on. You can top up balances if needed, but the amount you set at the start of the year is your ceiling unless you choose to increase it.

Who Should Use an HSA

An HSA is a great fit if you are:

  • An incorporated professional (dentist, lawyer, consultant, etc.)
  • A small business with 1-5 employees
  • A business with predictable, routine health costs
  • Anyone who wants tax-efficient health coverage without paying insurance premiums

Who Shouldn't Rely Solely on an HSA

An HSA alone may not be enough if:

  • Your business needs catastrophic or critical illness coverage
  • You or your employees have very high or unpredictable medical needs

In those cases, consider pairing an HSA with a basic insurance plan to get the best of both worlds.

The Bottom Line

For most Canadian small businesses, the tax savings far outweigh the limitations. An HSA lets you cover real health expenses, save thousands in taxes, and skip the waste of traditional insurance — all with zero premiums and zero paperwork.

Ready to see if an HSA is right for your business? Get started with Frontier Health — no setup fee, no commitment, cancel anytime.

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