Is Self-Administering an HSA Legal in Canada?

Health Spending Accounts (HSAs) are a tax-efficient way for small business owners and incorporated professionals to cover medical expenses. To remain tax-deductible and compliant with Canada Revenue Agency (CRA) regulations, an HSA must meet the definition of a Private Health Services Plan (PHSP). This requires the HSA to be ‘in the nature of insurance,’ meaning it must involve a legally enforceable agreement where a third party agrees to reimburse eligible medical expenses.

A common question we hear is: “Can I administer my own HSA?” The answer is no—at least, not if you want to remain CRA-compliant.

Why Self-Administration is Not Recommended

The CRA does not explicitly prohibit self-administered HSAs, but it requires that all PHSPs, including HSAs, function in the nature of insurance. This means that:

• There must be a separation of control between the employer funding the plan and the claims process.
• The plan must be structured to ensure risk-sharing and adherence to PHSP principles.
• The plan administrator must ensure that only eligible expenses are reimbursed to maintain tax-deductibility.

A self-administered HSA does not meet these requirements, making it highly vulnerable to actions by the CRA, including audits and potential loss of tax-deductibility.

Risks of Self-Administering an HSA

If a business chooses to self-administer its HSA, it faces several risks:

1. Fines or penalties from the CRA for an arrangement that doesn’t qualify as a PHSP
2. Loss of tax exemption on claims
3. Increased scrutiny on your business by the CRA in proving you can meet the requirements.
4. Incorrect claims processing and incorrect data collection and reporting, poor record keeping.
5. Conflicts of interest, since employers would process their own claims, the CRA may question impartiality, and reimbursements you pay yourself would likely be treated as taxable personal income or shareholder benefits.

The Frontier HSA Solution: 100% CRA Compliance & Tax-Deductibility

Partnering with a qualified and independent HSA provider like Frontier HSA ensures full compliance with CRA regulations, eliminating the risks associated with self-administration. Here’s why businesses choose Frontier HSA:

1. Employer–Administrator Contract: Your corporation signs an agreement (often called a “cost plus agreement”) with a Frontier HSA.
2. Employee Coverage: The employer’s plan states that employees (and their dependents) have the right to be reimbursed for eligible medical expenses, up to specified limits.
3. Administrator Pays Claims: When employees incur eligible expenses, they submit them to the administrator, which is legally obligated to pay those claims (i.e. “to indemnify”).
4. Employer Reimburses Administrator: The administrator then sends a “cost plus” invoice back to the employer for the actual claim costs plus an administration fee.

This arrangement follows the accepted industry standard so that your corporations HSA funds can be effectively being indemnified by a separate entity—thus meeting the requirement that the plan be “in the nature of insurance”

At the end of the day, you don’t want your business to struggle with added stress of CRA non-compliance, and since all the fees and tax associated with Frontier HSA are 100% tax deductible, it’s built in!

Ready to set up a fully compliant HSA? Learn how to get setup at frontierhsa.ca