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Health Spending Account backdating

Posted by K. Fry on April 22, 2014
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A frequent topic of interest is Health Spending Account backdating.  The question is can a HSA be backdated?

The short answer is no. Here's our expanded response.

Technical answer

An HSA, is in fact a Private Health Services Plan (a PHSP, which distinguishes itself from our Public Health Care System) and is defined in Section 248(1) of the Income Tax Act (Canada) and further explained in Interpretation Bulletin IT-339R2.

The Income Act (Canada), in summary, states that an employer can provide health benefits to an employee, and further the benefits to the employee are not taxable (tax free) and the benefits paid by the employer are a business outlay (tax deductible). This implies that CRA (Canada Revenue Agency) would expect a contract of employment  between the employer and the employee to insure compliance with the act. 

IT Bulletin 339-R2 discusses the meaning of  PHSP and states that a PHSP can take a number of forms but regardless of name or form must be “a plan in the nature of insurance”. In this respect the plan must contain the following basic elements.

  1. An undertaking by one person (or entity)
  2. To indemnify another person (or entity)
  3. For an agreed consideration (some form of compensation, such as a premium)
  4. From a loss in respect of an event
  5. The happening of which is uncertain

Simplified answer

 A PHSP or HSA, or any “insurance “ plan that offers employees health benefits must show, at a bare minimum, the following:

  1. An employer-employee relationship (this can be established by the acts within a contract). This necessity is clearly expressed in the Act
  2. A plan in the nature of insurance. Specifically, point 5 above answers the original question - can a HSA be backdated.

If a happening (an event) is uncertain, then one can insure against that event. An obvious example is home insurance, where a contract must be in place to insure a home before the event. This is obvious to all and follows all the elements stated above. Once a house has been damaged it cannot be insured for that damage.

It may be less obvious when considering a PHSP or a HSA, but as in home insurance claiming a loss before a contract is in place between the employer and an employee contravenes point 5 above and would render the contract invalid.

There are many excuses for allowing backdating in a HSA contract - none of which would be of use when challenged in court. 

what is a health spending account