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What Bookkeepers Need to Know About Health Spending Accounts

Posted by K. F. on August 6, 2015

Health Spending Accounts (HSA) are in demand within Canada’s small business community. Viewed as a viable and cost effective alternative to traditional health insurance, HSAs make paying for medical expenses affordable and easy for your small business clients.
As a bookkeeper, here's what you need to know about Health Spending Accounts.
Although straightforward to use, the product does require proper explanation and understanding before it is adopted by any particular small business. HSAs directly involve matters of taxation and ultimately business owners speak with their bookkeeper or accountant for clarification.

What are the key points you should be aware of when explaining an HSA?

An HSA 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 HSA/PHSP is met, the plan enables an employer to reimburse an employee (including shareholders) for eligible medical expenses on a tax-free basis. These reimbursements are 100% tax deductible.



What are the qualifications of an HSA?

To qualify, an HSA must include a minimum set of conditions:

  1. The HSA 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.

Try downloading our guide below for further insight into the Health Spending Account and how it can benefit your clients.

accountant health spending accounts guide