Health Spending Account Guidelines

By: Updated: April 20, 2021

Health Spending Account guidelines are important to understand. Viewed as a viable and cost effective alternative to traditional health insurance, Health Spending Accounts make paying for medical expenses affordable and easy.

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 need to understand some guidelines.

What is a Health Spending Account?

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.

Specific HSA 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.

HSA Guidelines for Backdating

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 it 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

A Health Spending Account, or any “insurance“ plan that offers an employee 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 Income Tax Act.
  2. A plan in the nature of insurance. 

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 Health Spending Account, but as with 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. 


Download our FREE Guide to learn the key elements of a Health Spending Account:

Download Beginner's HSA Guide for an incorporated individual


Related Reading:

What's covered in a Health Spending Account?

How does a Health Spending Account work for a small business in Canada?

Health Spending Account limits


Write off 100% of your medical expenses

Are you an incorporated business owner with no employees? Learn how to use a Health Spending Account to pay for your medical expenses through your corporation: 

Download the HSA Guide for Incorporated Individuals

Do you own a corporation with employees? Discover a tax deductible health and dental plan that has no premiums:

Download the HSA Guide for a Business with Staff

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