3 steps to a successful Health Spending Account for small business

A Health Spending Account for small business is an alternative to traditional health insurance plans.  

Here's how to find success with a Health Spending Account for your small business in Canada.

What is a Health Spending Account for small business?

A Health Spending Account is a Private Health Services Plan (PHSP). Plans of this nature are derived from Section 248(1) of the Income Tax Act (the Act) and Interpretation Bulletin IT-339R2.

Assuming the definition of a PHSP is met, a Health Spending Account enables an employer to reimburse an employee (including shareholder/employees) for eligible medical expenses on a tax-free basis while deducting these expenses.

Medical benefits paid on behalf of an employee by an employer are not taxable as a benefit to the individual; nor are the claim benefits themselves taxable to the individual employee. The cost of these benefits is considered a business expense.

1. Know your HSA provider

Dig beneath the surface of a provider to find out as much as you can.

1. Are they transparent?
2. Do they have a mailing address or a PO box?
3. Do they have adequate and secure technology?
4. How long have they been in business?
5. How many customers do they have?
6. How many claims do they process in a year?
7. What is their audit process for claims?
8. Are they Canada wide?
9. Who are the key individuals behind the company?
10. Has the company been recognized for industry awards?

2. Understand the guidelines

To qualify, a Health Spending Account must include a minimum set of conditions:

1. The Health Spending Account is in the nature of insurance.
2. The employer is under legal obligation to fund the spending account for each employee
3. All employees in a particular classification must be offered equivalent benefit levels.
4. Employees not forego any amount to which he/she would otherwise be entitled in order to obtain the increased benefit (IE: a salary decrease to accommodate for enrollment in the the Health Spending Account).
5. In order to provide for the necessity of an element of risk, all reimbursement credits must be claimed in the year in which they are incurred or within 12 months of the plan year.
6. Eligibility is maintained with respect to medical expenses, employees, and dependents.
7. No allowance is made for cash payments in respect of unused reimbursement credits.

3. Speak with your accountant

Although straightforward to use, the product does require proper explanation and understanding before it is adopted by any particular small business. Health Spending Accounts directly involve matters of taxation and ultimately business owners speak with their accountant for clarification.

A Health Spending Account for small business has been widely adopted across Canada's community of contractors, incorporated professionals, and entrepreneurs. Get our free guide and learn how to make your medical expenses more affordable.