What Accountants Need to Know About Health Spending Accounts

Health Spending Accounts are in demand within Canada’s small business community. 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 speak with their accountant for clarification.

What are they key points you should be aware of when explaining 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.

What are the qualifications of a Health Spending Account?

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.

Download our guide below for further insight into a Health Spending Account and how it can benefit your clients: