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Common Misconceptions about Health Spending Account Costs

Posted by Alden Hui on September 12, 2018
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Updated: June 25, 2019

Many misconceptions stem from the fact that employers see Health Spending Accounts (HSA) and traditional health insurance plans as the same thing. While they both offer a solution to health and dental coverage, they are fundamentally different in implementation. Often, small business owners ask us about premiums in a Health Spending Account plan and are surprised to hear that there are none. Here is why:


Health Spending Accounts are tax plans which allow business owners to turn their after-(income) tax, personal medical expenses into before-tax business expenses. Simple enough…. But what happens when you start to hire employees? Things get a little more complex. Employers look for ways to provide an employee benefit to their employees. Ultimately, they compare traditional health insurance plans with a HSA. While they are both employee benefits, they work differently.

Employee contributions to a health insurance plan are taxable. A health spending account is tax-free. Under an ideal insurance plan, the employer pays the insurance company in the form of premiums and the insurance company reimburses any medical costs incurred by the company’s employees. This rarely happens because of coverage limits, restrictions, deductibles, etc.

Health Spending Accounts are different. In HSA plans, the employer allocates a set amount (health spending account limits) to their employees based on their classification. Employees can then spend these funds on any eligible medical expenses of their choosing. These funds are tax free for the employee and a business expense for the company. Any overages (of the pre-set limit) are paid personally by the employee.

As you can see, the plans compete to cover an employee’s health and dental expenses, but work in fundamentally different ways. From this example, I hope you can see that a HSA allows an employer to fully control their benefit plan costs. At the same time, you will be able to see whether an employee requires more funds or less. Any unused funds are re-allocated for future use or refund. Money is never lost, even if your workers are healthy and not making claims in a given year. 


Discover the truth behind private health insurance.


Why can’t I allocate funds (reimburse directly) to the employee?  

If you give money to or reimburse employees directly, then they pay income tax on all your reimbursements.

Example: If you give $3,000 to an employee, they must pay income tax on it, just like regular salary or bonuses. If you allocate $3,000 through a Health Spending Account, the employee is not taxed on this amount and is able to use it for any eligible medical expense.

Health Spending Account reimbursements are a non-taxable benefit (100% tax free) for your employees. As a professional administrator, Olympia works with the CRA to maintain integrity within each health and dental claim and plan. We make sure claims run smoothly and employees are reimbursed in a timely manner (typically 1-2 business days).


Health Spending Accounts have no premiums

Health Spending Accounts are not insurance plans. They have some aspects of tax planning and insurance. They are a tool for small business owners to reduce medical costs.

There are no premiums or monthly charges associated with a Health Spending Account.

Olympia Benefits has 4 different plans depending on your business. None of these plans have premiums or hidden fees.

The HSA Basic is $249 paid annually

The HSA Plus is $499 paid annually

The HSA Deluxe is $699 paid annually

The annual fee includes the whole family; you, your spouse and any dependants.

The HSA Group is for a business with employees and has a one-time setup fee of $335, $99 annual renewal fee, $40 fee per employee added to the plan, and 8% administration fee on claims.


Unincorporated Businesses are only eligible if they have at least 1 arm's length employee 

If you are an unincorporated business or sole proprietorship, your business must have at least one arm's length employee to be eligible for a Health Spending Account. Incorporated businesses are eligible even if it is operated by only the owner.


Ontario applies a provincial tax to Health Spending Accounts 

The Ontario government has its own unique tax treatment of "insurance premiums" and Health Spending Accounts.  There is a 2% special Premium tax and 8% RST on the claimed amount.  A 13% HST is also charged on the administration fee amount. 

Example of a $1,000 claim in Ontario

1. HSA Deluxe / Plus / Basic

Premium tax: 2% of $1000 ($20)

RST: 8% of $1000 ($80)

No HST because the Olympia Benefits plans in this example have no administration fee

Total: $1,100

Note: these calculations are built into Olympia's platform when Ontario residents are making a claim.

Health Spending Accounts are made for employees... not shareholders

The owner of the business is eligible for an HSA as long as they can show reasonable proof that they are an employee. A common way to do this is by paying yourself in T4 income. It is not advisable to pay yourself in only dividends as this would make you look like a shareholder in the event that you are audited by CRA. 

An HSA must adhere to the guidelines set by the Income Tax Act

There is a lot of technical wording within the Income Tax Act but the key thing you should know is that the HSA was originally known as a Private Health Services Plan (PHSP) and meant to provide small business owners or independent contractors with a way to receive benefits like regular salaried employees. 

HSA's always comes last when claiming a medical expense

The HSA can work in conjunction with various health insurance plans. Always claim on your health insurance plan first and then claim any remaining, non-reimbursed amounts with an HSA. By following this order, you ensure maximum return. 

You cannot use a Health Spending Account AND the METC

As previously stated, a Health Spending Account deals with tax implications because it effectively turns after-tax medical expenses into before-tax. This means you cannot claim your medical expenses in a tax credit like the Medical Expense Tax Credit (METC) and also claim them through a Health Spending Account
 

The Health Spending Account must include an annual spending amount

The amount in the annual spending account is decided in the contract between the employer and the employee. If the amount is increased at will, then there is no reasonable degree of risk. The spending limit is controlled by the administrator (Olympia). The employer can fill out a form in the case where they decide to increase the limit for employees. This same reasonable degree of risk is also present in a rollover.

Download the FREE Beginner's Guide to Health Spending Accounts:

No more deciphering costs, liabilities, and policies. Know how much you spend and get unspent money back. 

The Beginner's Guide to Health Spending Accounts GROUP HSA Employee Benefits


For a small business with no employees (single person or business with spouse):

beginner's guide to health spending accounts HSA 2020 eligible expenses


Related Reading:

An Explanation of Health Spending Account Taxes by Province

Top 5 Health Spending Account Frequently Asked Questions

Top 19 FAQ's for a Health Spending Account

 

Topics: health spending account, costs, premiums