Health Spending Accounts for Small Businesses: A Concise Guide

A Health Spending Account (HSA) provides a tax-efficient and flexible solution for Canadian businesses to manage employee medical, dental and vision expenses. Unlike traditional insurance, which requires fixed premiums for predefined coverage, an HSA allows businesses to directly reimburse employees for the medical expenses they actually use.

What is an HSA?

An HSA is a benefit plan which reimburses employees for eligible healthcare expenses with tax-free funds. An HSA is also known as a Health Care Spending Account (HCSA) or a Private Health Services Plan (PHSP) and is established by Section 248(1) of the Income Tax Act.

An HSA works by reducing the amount you pay in taxes for eligible medical expenses. For example, an individual who makes $120,000 per year in Alberta at a marginal tax rate of 36% would have to earn $6,955 in pre-tax income in order to cover $5,000 in medical expenses. By using an HSA, these expenses become 100% tax-deducible, saving you money. Even when factoring in our administrative costs, an incorporated individual would save $1,409 or 20% of their pre-tax dollars by using Frontier HSA.

As an incorporated individual, this means you would save significantly on out-of-pocket medical expenses by turning your post-tax personal expenses into pre-tax savings corporate savings.  As a Business with Staff, this means ditching the complicated policy guidelines, hidden deductibles and expensive monthly premiums in favour of flexible coverage that your employees will actually use.

How Does an HSA Work?

Unlike traditional insurance, there are no complicated policy guidelines, exclusions, deductibles, or co-insurance. Setting up and administering an HSA is straightforward and easy to understand. The process is as follows:

1. BUDGET: The employer establishes a plan with annual contribution limits for each class of employee (for example, this may be $15,000 for executive members, $8,000 for senior members, and $3,000 for full-time staff).
2. PAY: The employee will pay for eligible medical expenses upfront using their personal accounts, ensuring they retain their original receipts.
3. CLAIM: Employees submit their claims to Frontier HSA through our web browser or easy-to-use mobile app.
4. EXPENSE: The employer transfers payment for employee claims to Frontier HSA from their corporate account.
5. REIMBURSE: Frontier HSA reimburses the employee for their claim directly to their personal account.
6. PROFIT: Frontier HSA will provide an annual contribution statement to the Employer which can be used to claim all employee medical expenses as a 100% tax free benefit, saving you money.

What Does an HSA Cover?

An HSA covers a broad range of medical expenses. If the medical expense is provided by a qualified medical professional, it is likely covered in your HSA plan. More specifically, an HSA  covers all common expenses such as prescription drugs, dental and vision care, chiropractic treatments, physiotherapy, massage therapy, acupuncture, mental health services, and medical equipment.

An HSA does not cover strictly cosmetic procedures, over-the-counter medications without a prescription, or general wellness expenses like gym memberships.

For a complete list of eligible expenses, please visit our list of eligible medical expenses [link]. You can also refer to the CRA website [Link] for more details on approved medical expenses.

Am I Eligible to Set-up an HSA?

There are three types of businesses that are eligible to establish an HSA, Incorporated Individuals, Business with Staff, and Sole Proprietors, there are, respectively:

1. A corporation with no arms length employees;
2. a corporation with more than one arms length employees; and
3. a sole proprietorship or partnership with more than one arms length employees.

Due to the complicated and restrictive tax regulations surrounding establishing an HSA as a sole-proprietor, Frontier HSA advises against sole-proprietors establishing an HSA. As a result, Frontier HSA does not offer HSAs to sole-proprietors at this time.

If you are incorporated you are eligible to establish an HSA, with the following stipulations:

• Incorporated Individual: Must be actively working in the business and receiving T4 employment income.
• Business with Staff: Annual contribution limits for employee classes must meet the definition of “reasonable limit.” More information on reasonable limits can be found here [link]

Key Takeaways

A Health Spending Account (HSA) is a strategic choice for Canadian businesses seeking flexibility, simplicity and cost-effective health coverage. By reimbursing employees for actual medical costs rather than paying fixed premiums, businesses can better manage their budgets while ensuring employees receive comprehensive healthcare coverage. Whether you're a small business owner or managing a larger workforce, an HSA can be a smart financial decision that benefits both employers and employees.