A Health Spending Account (HSA) is a self-insured health plan which can be arranged by employers for their employees. Small business owners spend a considerable amount of money every year on medical expenses for themselves and their employees. An HSA offers an affordable way for owner-managers to reduce these expenses.
Reasons for Choosing an HSA
You should consider an HSA because of the following reasons.
- The benefits offered through an HSA are completely tax deductible to the business. The benefits (both medical and dental) are received 100% tax-free by the employees.
- It’s possible to fit an HSA into your existing insurance plan. This way it can pay for things which are not covered or are partially covered by your existing plan.
- It can also be used as a stand-alone solution and reimburse you and your employees for most dental and medical expenses.
Eligibility for an HSA
You are eligible for an HSA if you meet the following criteria.
- You own a business
- Pay medical bills
- Receive T4 income/pay income tax
How does an HSA Work?
An HSA starts working when your employee makes a purchase or has a partly paid expense by another insurance plan. The HSA provider will then manage the process from receipt of the employees claim to paying the reimbursement. This payment will be up to the limit set by your business.
Once the claim is processed, your business will get an invoice for the service as a business expense and your employee will get a tax-free reimbursement. The invoice from the HSA is usually the expense amount submitted by the employee plus 10% as a service charge.
If you’re running a corporation, then you can use a stand-alone HSA and get the option of adding onto it according to your needs.
If you’re a sole proprietor or a partnership, then the CRA will need the HSA program to create a contract of insurance between two legal entities.
Since a sole proprietor is also an “employee”, a legal entity, relevant insurance components from another legal entity will be needed to complete the insurance contract.
Advantages of Using an HSA
- Transparent Management: Online applications in an HSA give you control over every part of your plan. Using the admin console, you can see the status of your plan, add or modify users, and even administer benefits.
- Online Claim Filing: Your employees can file claims online, directly and discretely. They’ll be able to see their spending budget and will have the flexibility in deciding on how to use it.
- Paying for Healthcare with Tax-Free Dollars: Healthcare expenses can be tax-free if they’re managed in a Health Spending Account. Your business won’t have to add money to your T4 income, pay tax in that income and then pay for medical expenses. You’ll get considerable savings because you’ll be paying for these expenses with pre-tax dollars.
- A Wide Range of Allowable Expenses: HSA’s cover a wide range of medical expenses including physiotherapy, vision care, paramedical services, prescription drugs along with basic and major dental expenses.
- Flexible Funding: You have two funding options.
- Pre-Funding: In this option, you can submit an amount of money into the plan and create a funding pool. Funds are then drawn automatically from this pool for each approved claim.
- Pay-As-You-Go Funding: In this option, an email is sent to the company administrator whenever an employee submits a claim. The company then provides funding, via cheque or online bill payment, to cover the claim along with the service fee. If no claims are submitted then no funds are needed in the plan.