There can be confusion between a Health Spending Account and a Health Savings Account. Today, I'm going to clear up the differences for you.
The primary difference is that Health Spending Accounts exist only in Canada and Health Savings Accounts exist only in the United States.
Health Spending Accounts are an affordable way for Canadian small business owners and their employees to minimize their medical expense costs. Meanwhile, a Health Savings Account is a personal savings account for Americans with high deductible health insurance plans.
What is a Health Spending Account?
A Health Spending Account (HSA) is often referred to as a Health Care Spending Account (HCSA) or Private Health Services Plan (PHSP). These names are used interchangeably and usually mean one and the same thing. For ease of reading, I will refer to these plans as a Health Spending Account (or HSA) for the rest of the article.
A Health Spending Account is a cost-effective way to provide health and dental benefits to employees. Simply put, health and dental benefits offered through this plan are fully tax deductible to the business and received 100% tax free by the employees. There are no premiums, hidden fees, deductibles, copay, or complex policies.
Who can use a Health Spending Account?
You are eligible for a Health Spending Account if you:
- Own an incorporated business
- Pay medical bills
- Pay income tax / receive T4 income
How does a Health Spending Account work?
Health Spending Accounts turns personal after-tax medical expenses into before tax business expenses through the claims process. For a single person business, the owner can simply make and then fund the claim. For a corporation with arm's length employees, employees can get reimbursed tax-free for their medical expenses, with funds pulled from a pre-funded account within the Health Spending Account. For more information on how the plan works for small businesses, please refer to our article "How does a Health Spending Account work?".
What is a Health Savings Account?
Like its name, Health Savings Accounts in the US are personal (tax-free) savings account which are used for eligible medical expenses (determined by the IRS). In order to qualify for a Health Savings Account, you must have a high-deductible health plan. The benefit of this HSA is to allow for savings to cover out-of-pocket health care costs which are not covered in the HDHP. The plan is tax free for both contributions and withdrawals. However, funds inside the account can only be used for eligible expenses.
Who can use a Health Savings Account?
As previously mentioned, anyone who has a high deductible health plan qualifies. Unfortunately, this plan is not for everyone... primarily due to the high deductible requirement. As a result, those who suffer from existing medical conditions may not be the right fit. Furthermore, any withdrawal not used for an eligible medical expense will face a steep penalty (taxes plus 20%). This rule becomes more relaxed for those over 65 (only taxes must be paid). Withdrawals can also be used for spouses and dependents, even if they do not have a HDHP.
How does a Health Savings Account work?
You can open this type of account with a qualified provider and begin to deposit funds every year. Even your employer can contribute if it is something they offer. However, the maximum annual hsa contribution limit varies by year and your HDHP policy. For more information, check out this article.
Key Takeaway for Canadian Small Businesses
In many cases, a Health Spending Account (or also referred to as a PHSP / HCSA) will be used by small companies and self-employed business owners (contractors, consultants). Instead of paying monthly premiums, you simply eliminate the income tax on medical expenses for yourself (the owner) and your employees. Talk about savings!
Find out how much you could save with our Health Spending Account (HSA) Calculator
Next Steps: Download the Beginner's Guide to a Health Spending Account
Download this guide if you are a self employed business owner:
Download this guide if you are a small business with arm's length employees:
Other Health Spending Account resources: