Benefits can be confusing. Many people default to traditional health insurance, but it can be complex, expensive, and isn't always the best fit. If you’ve heard about Health Spending Accounts (HSAs) and are wondering how they compare to insurance (or if they can replace it), you're not alone.
HSAs are a cost-effective alternative to insurance, especially for small or medium-sized businesses in Canada. In this article, we'll break down the key differences between HSAs and insurance and when each one is a good fit, so that you can decide which is right for you.
Health Spending Account (HSA) vs Health Insurance: The Quick Answer
- In Canada, health insurance plans pay a portion of health and dental expenses that are not covered by universal health care, such as prescription drugs, dental care, vision care, and physiotherapy in exchange for a fee (premiums).
- In Canada, an HSA is an employer-funded account that provides employees with a set amount of money each year to pay for medical expenses. An HSA reimburses employees 100% tax-free for all of their eligible medical expenses until their yearly balance is used.
- Health insurance and HSAs often work best when used together, with insurance offering protection against large, unexpected medical costs, and HSAs covering day-to-day medical expenses, tax-free.
What is Health Insurance?
Health insurance is an agreement between a company and a consumer where the company agrees to pay for a portion of the consumer's medical expenses in return for a fee (premium).
Health insurance plans often have deductibles, which are an amount that you must pay out-of-pocket before your insurance will start covering a claim. After you have hit your deductible, health insurance may pay all, or a portion, of your medical expense.
What is a Health Spending Account (HSA)?
A Health Spending Account is an employer-funded account that provides employees with a set amount of money each year to pay for medical expenses. Employees are reimbursed 100% tax-free for their eligible medical expenses through this account until their yearly balance is used.
Unlike traditional health insurance, an HSA has no premiums, deductibles, or copayments. Employees choose how to spend the funds based on their individual needs, and every eligible expense is reimbursed in full until the balance is used.
The Key Differences Between an HSA and Health Insurance:
Health insurance is designed to protect you against unexpected, expensive medical bills, whereas an HSA is a tax-advantaged account used to reimburse your out-of-pocket medical expenses.
The table below outlines the key differences between the two:
| Health Spending Account (HSA) | Health Insurance | |
| Purpose | To pay for anticipated, everyday medical expenses | To protect you from large, unexpected medical bills |
| How it Works | You (or your employer) fund the account, which reimburses you 100% for eligible medical expenses | You pay a monthly premium to an insurer, who then covers a portion of your eligible healthcare costs |
| Premiums | No premiums | Monthly premiums, often increasing with each plan renewal |
| Eligible Expenses | No limits for number of visits and treatments | Limits for number of visits and treatments |
| Complexity | 100% coverage for all eligible expenses up to annual spending limit | Restrictions, co-insurance, deductibles, and fee guides |
| Deductibles | No deductibles | Coverage can be restricted by a co-insurance of 50% - 80% |
| Plan Structure | Flexible plan- limits, classifications, and payment structure are customizable | Often rigid when it comes to payment and coverage |
Can you use both an HSA and insurance?
Rather than choosing one over the other, many people find that HSAs and insurance work best when used together.
Here's how they complement each other:
- Insurance: covers unexpected events, such as ambulance services and emergency hospital stays
- HSA: covers everyday expenses like dental work, vision care, and prescription medications
This combination can provide both financial protection and day-to-day cost savings for healthcare expenses.
At Olympia Benefits, you can choose to add travel medical and emergency medical insurance to any HSA plan. Learn more here.
When is an HSA Right for You?
HSAs are often a good fit for business owners, especially for small and medium-sized businesses. Here are a few questions to ask yourself when deciding if an HSA is right for you:
Do you have an incorporated business?
HSAs are available to incorporated business owners and their employees.
Do you want more flexibility with your healthcare spending?
Health insurance typically has limited coverage and restrictions based on the type of expense. An HSA offers 100% coverage on all eligible expenses up to your annual spending limit, with no restrictions based on category or type of expense.
Is cost control an important factor for you?
Insurance costs rise unpredictably, but an HSA gives you more control. You pre-determine annual spending limits for your employees, and only pay for claims that are submitted, so you're never paying for coverage that you don't use.
To see how much you could save with an HSA, try our free savings calculator and get a personalized estimate.
Frequently Asked Questions (FAQ)
Is an HSA cheaper than health insurance?
In most cases, an HSA is more cost-effective than health insurance. This is because there are no premiums, and you only pay for what is actually claimed.
What can an HSA cover?
An HSA can cover a wide range of eligible medical expenses, including dental care, vision care, prescriptions, physiotherapy, and more. See a full list of eligible expenses here.
Who can use an HSA?
HSAs are designed for incorporated professionals and teams looking for flexible, cost-controlled benefits.
Can dependents claim expenses through an HSA?
Yes, dependents can claim expenses through an HSA and share the account’s annual limit.
Eligible dependents typically include:
-
Your spouse (including common-law partner)
-
Your unmarried, unemployed dependent children (including biological, adopted, and stepchildren)
To qualify, dependents must:
-
Be under age 21 (or age 25 if they are full-time students)
-
Be claimed as dependents on your personal tax return
Can you use an HSA alongside a traditional insurance plan?
Yes, you can hold both a traditional insurance plan and an HSA at the same time. In fact, premiums and other associated costs paid in a health insurance plan can be claimed through an HSA. This means that you can make your insurance premiums tax-free.
Is an HSA or health insurance better?
HSAs and health insurance serve different purposes. Insurance is best for protection against major, unexpected costs, while an HSA is ideal for managing everyday healthcare expenses. Many people benefit from using both together.
Have questions or want to see how an HSA would work for your business? Contact Olympia Benefits at 1-888-668-8384 or info@olympiabenefits.com.
Disclaimer: This content is provided for general informational purposes only and does not constitute financial, tax, legal, insurance, or medical advice. Olympia Benefits Inc. makes no representations or warranties, express or implied, regarding the completeness, accuracy, reliability, and suitability of the information contained herein. While reasonable efforts are made to ensure the information is current, the applicable laws, regulations, guidelines, and administrative practices may change from time to time, and may also vary based on individual circumstances. Readers should conduct their own research prior to opening a Health Spending Account.
