Updated January 19, 2018.
Everyday, I am in contact with Canadian small business owners searching for a cost effective way to pay for their medical expenses. Here's a list of the most frequently asked questions that I receive about Health Spending Accounts (HSA).
Please note that the term Health Spending Account / HSA can be interchanged with Private Health Services Plan (PHSP).
Please note: this article is for an owner / operator business with no staff (you or your spouse are the only employees). If you have a business with staff, please see our the 22 FAQ for a Health Spending Account for a Business with a staff.
1. What is a Health Spending Account (HSA)?
A Health Spending Account is an alternative to traditional health insurance. Used by thousands of small business owners across Canada, an HSA is a special account that is established to exclusively pay for health care services for you and your family members.
An HSA enables a small business to deduct 100% of their family health and dental expenses - without paying standard premiums typically associated with traditional health insurance plans.
The ability to write off health and dental expenses can create savings of more than 30% on medical and dental related expenses. For contractors, consultants, and other incorproated small business owners, this is an effective tool to cut your taxes and reduce your medical costs.
2. Do I qualify?
You are an excellent candidate for an HSA if you own a business, have medical bills, and pay income tax.
3. How will an HSA in Canada save me money?
An HSA will save you money in three ways:
- Tax savings from deducting 100% of your medical costs
- Reducing your costs by avoiding high premiums associated with traditional health insurance
- The elimination of expensive deductibles and co-payments
Below is an example of a savings comparison between a medical expese paid personally vs through your business.
Choice 1 – After Tax (personal medical expense paid for out of pocket)
The medical expense could represent a year's worth of uncovered expenses that has been paid for by you, personally, with out of pocket after tax dollars. After tax dollars is the amount remaining after personal income tax is paid. In this example’s tax bracket, the company will pay $5,340 (including income tax). 43% is used to pay income tax ($2,340).
To explain in detail, each $1 you spend on medical expenses requires your company to pay you approximately $1.78 before tax. 43% (or 78 cents) is paid in tax to Canada Revenue Agency in the form of provincial and federal taxes.
Choice 2 – Before Tax (medical expense is paid for through your business)
In this case, the medical expense is paid through your corporation as a before tax business expense. Effectively, your business is able to write off 100% of your medical expense. You save money by keeping the additional 43% tax inside your corporation.
The cost of the Health Spending HSA will vary by provider. In this example the yearly (total) cost of the HSA is $499. You would pay $499 instead of $2,340 in taxes.
4. Is an HSA effective for an owner/operator/one person business?
This category of businesses includes incorporated consultants, contractors, and professional corporations. This segment of Canada's business community is overlooked by traditional health insurance carriers as it is difficult and expensive to insure.
Interestingly, it can be argued that an HSA is most effective for a one person business. The majority of Olympia clients are owner/operator businesses. By using an HSA, you and your family would benefit from a 100% tax deduction for your family medical benefits.
Here's some of the advantages of an HSA for an owner/operator/one person business:
- Deduct 100% of your family's medical expenses
- Reduce your personal taxes
- Get comprehensive medical coverage for your expenses
- There are no premiums
- Compliment your spousal insurance
5. What types of health and dental expenses are covered under a Health Spending Account?
One of the great benefits of an HSA is the freedom it provides through the extensive range of eligible expenses. Forget about restrictions. You'll love being able to claim 100% of your child's dental braces. These types of expenses along with a thorough list of qualified medical practitioners, procedures, and medical devices helps make Health Spending Account an attractive choice for the small business owner.
Unlike many traditional insurance plans, a HSA offers 100% coverage on a wide range of expenses...even the expensive ones. Does your son need physiotherapy? Does your spouse need a new pair of glasses or maybe laser eye surgery? Maybe you want to get an MRI? Rest assured, all of these are eligible expenses with a Health Spending Account.
You can even claim your spouse's premiums if they are a member of a traditional insurance plan. That's right. Premiums contributed to a non-government insurance plan are an eligible expenses with a Health Spending Account. How great is that?!
Do you have unpaid portions that are not covered from your spouse's plan? Not a problem - the remaining amount of an expense is eligible with a Health Spending Account. Fantastic.
Prescription drugs, massage therapy, and hearing aids are all eligible expenses too. If you are traveling to the sun on your upcoming vacation...pick up a pair of prescriptions sunglasses so you can read on the beach (the sunglasses are eligible as well). Sore feet from that long hike or fishing trip? Pay a visit to your friendly Podiatrist as all of their services are eligible expenses.
6. Are my dependants covered?
Dependants are eligible with few restrictions.
7. How does an HSA compare to a traditional health insurance plan?
There are several advantage of a HSA compared to a traditional health insurance plan. Premiums, expense eligibility, ease of use, deductibles, and claims are some of the areas an HSA is considered more favorable. Understanding the difference between insurance and administration is critical when deciding on how to pay for your medical expenses.
Here's 5 reasons an HSA (also known as a Private Health Services Plan or PHSP) is better than a traditional health insurance plan.
1. Premium Creep
Traditional Insurance Plan
- Monthly premium for coverage regardless of access or usage to the plan
- Monthly premium rate often increased at the annual renewal of the policy (premium creep)
- Age of the individual will affect the price of your plan
- Avoid a premium creep due to usage or age factors
- Most Health Spending Accounts have fixed fee as opposed to a premium
- Pay for the expenses you incur, eliminating a situation where you have paid into a program that you did not use.
2. Eligible Expenses and Pre-existing Conditions
Traditional Insurance Plan
- Eligible medical expenses are restricted
- Items that you wish to claim under this policy may be restricted by an annual or life time maximum or require special authorization in order to obtain eligibility.
- At time of enrollment, medical history will be requested and pre-existing conditions may be excluded or reduced from coverage.
- Expenses are not restricted by type of expense, only on the dollar amount
- You will have access to a wider range of eligible expenses
- Will not restrict or limit benefits due to a pre-existing medical condition
Traditional Insurance Plan
- Under a fully insured program, you will receive a plan booklet outlining the items that are covered and also the ones restricted or excluded by definition, co-insurance, deductibles or fee guides. Figuring out what your coverage is and if it will be reimbursed partially or in full can get complicated.
- A PHSP is typically only restricted by dollar amount. You will have 100% coverage for all eligible expenses up to your spending account limit. Your account balance is updated by the administrator every time a claim is processed, eliminating the need to keep track of this information manually.
Traditional Insurance Plan
- Your benefits may be restricted by an annual single/family deductible
- Benefits can be restricted by a co-insurance of 50%-80%
- There is a limit for the number of visits and treatments.
- No deductible
- You are not restricted by co-insurance
- No limits for the number of visits and treatments
A PHSP with a digital claim platform will process your claim within 24 hours versus many traditional insurance claims that can take several weeks to process.
8. Do I qualify for an HSA even though I have a pre-existing condition?
Yes, you qualify. Pre-existing conditions do not affect your eligibility for an HSA.
9. How does an HSA claim work?
- Pay for your medical expense (let’s say with your personal credit card). (Pay provider $1,000)
- Make an online claim (enter your expense details, submit the claim, make a payment from your corporation for the amount of your expense). (Pay the administrator $1,000 from your corporation)
- The administrator reimburses your personal banking account for the original expense ($1,000)
The payment from your corporation to the administrator is 100% tax deductible. The reimbursement you receive from the administrator is 100% tax free.
10. Is there a limit to how much I can deduct?
There are several factors that determine the limits within an HSA. A reasonable maximum benefit level for an incorporated business owner is $15,000 per year. If the business has additional employee, the business owner is able to determine specific amounts for each classification of employee (management, full time, etc).
11. How much does an HSA cost?
Prices can vary as with most other products. An administrator can charge an upfront setup fee, an ongoing administration fee based on the amount of your claims, a maintenance fee, or sometimes these fees are replaced with a fixed annual fee. Here's an example of the pricing for an HSA that uses a fixed annual fee format.
12. Can I set up and administer an HSA myself?
In theory, you can self administer an HSA for your business. You can also do your own accounting, legal work, and website development. The fact of the matter is time is your most valuable asset and you would need to determine if you have the expertise and resources at hand to properly establish, organize, and maintain your own plan. Are you going to be able to dedicate scarce resources to the administration of your HSA?
Strict guidelines and conditions are required to qualify a HSA and ongoing knowledge is required to properly adjudicate claims. In exchange for a small fee to a provider, you can be worry free that your HSA qualifies with CRA and focus your time on your business and more important matters.
Moreover, what happens if you are audited and there is a problem with your plan? Having a third party administrator gives you an added layer of protection and signals your HSA is the hands of an expert that is well equipped in the specifics and intricacy of this financial product.
13. What can I give my accountant?
Although straightforward to use, an HSA does require proper explanation and understanding before it is adopted by any particular small business. An HSA directly involves matters of taxation and ultimately some small business owners speak with their accountant for clarification. You can forward this article and guide to your accountant for review.
14. Are Health Spending Accounts legal? Given they involve taxes, does it comply with Canada Revenue Agency?
Yes! An HSA is legal in Canada - as long as the guidelines are properly adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.
13. When will my HSA become effective?
Effective dates for HSAs are an important component for CRA eligibility. An HSA is effective immediately on the day you join and cannot be backdated to the beginning of your fiscal year. There are no waiting periods.
15. How long has the HSA been available to Canadian businesses?
The HSA has been available since the 80's. Olympia Benefits is a pioneer and largely responsible for the initial marketing and promotion of the concept to Canada's small business community. Since 1996, Olympia has been marketing and administering HSAs.
16. What's the difference between an HSA and insurance?
A Health Spending Account is a tax plan in the nature of insurance. It feels like insurance since it deals with medical costs. The critical difference however, is that by paying for medical expenses through an HSA, you are self-insuring. There are significant advantages to paying for medical expenses through a tax plan instead of an insurance plan.
17. Are there different types of Health Spending Accounts?
Once you get past all the marketing, an HSA is a contract. Specifically, it is a contract between an employer (a business) and an employee. The conditions of the contract should outline the relationship between the employer, employee, and the administrator. So in that sense, all HSAs are the same.
However, there are some key conditions that will affect the HSA. Are there arm's length employees? What type of compensation does the owner receive (dividends)? Are the employees part time?
18. How do you select an HSA provider?
For the most part, HSA are marketed and administered by reputable firms with a proven and documented track record. Unfortunately, the industry is unregulated and there are no barriers to entry. Make sure you dig beneath the surface and find out the warnings signs of a HSA provider that is cutting corners.
19. Why are HSAs less common than insurance?
Large providers of traditional health and dental insurance in Canada are very adept at marketing. In fact, they are so effective at developing and delivering targeted messaging that many small Canadian business owners firmly believe that purchasing traditional insurance is a must to effectively protect themselves and their families. The truth is, there are viable alternatives to insurance. Keep an open mind!
Feel free to download our Complete Guide to Health Spending Accounts if you want to continue your research:
Or if you're ready to sign up --> Get simple step-by-step instructions on setting up your HSA