Understanding Health Spending Accounts (HSAs) in Canada: A Practical Guide for Business Owners

A Health Spending Account (HSA) provides a tax-efficient and flexible solution for Canadian businesses to manage employee medical, dental, and vision expenses. Unlike traditional insurance, which requires fixed premiums for predefined coverage, an HSA allows businesses to directly reimburse employees for the medical expenses they actually use.

What is an HSA?

An HSA is a benefit plan that reimburses employees for eligible healthcare expenses with tax-free funds. It is also known as a Health Care Spending Account (HCSA) or a Private Health Services Plan (PHSP) and is established under Section 248(1) of the Income Tax Act.

An HSA works by reducing the amount you pay in taxes for eligible medical expenses. For example, an individual who makes $100,000 per year in Alberta at a 39.5% marginal tax rate would have to earn $8,264 in pre-tax income to cover $5,000 in medical expenses out of pocket.

By using an HSA, these expenses become 100% tax-deductible, reducing the actual cost. Even when factoring in administrative fees, an incorporated individual would save $1,476, or 29.5% of their pre-tax dollars, by using an HSA.

For incorporated individuals, this means turning post-tax personal expenses into pre-tax corporate expenses, resulting in significant tax savings. For businesses with employees, an HSA eliminates complex insurance policies, hidden deductibles, and expensive monthly premiums in favor of a flexible plan employees will actually use.

How Does an HSA Work?

Unlike traditional insurance, HSAs have no complicated policy guidelines, exclusions, deductibles, or co-insurance. Setting up and administering an HSA is straightforward:

1. BUDGET: The employer sets contribution limits for different employee classes (e.g., $15,000 for executives, $8,000 for senior staff, $3,000 for full-time employees).
2. PAY: Employees pay for eligible medical expenses upfront and keep their original receipts.
3. CLAIM: Employees submit claims through Frontier HSA’s web portal or mobile app.
4. EXPENSE: The employer transfers funds to Frontier HSA from their corporate account.
5. REIMBURSE: Employees are reimbursed directly to their personal bank accounts.
6. TAX SAVINGS: Employers receive an annual statement from Frontier HSA, allowing them to claim all medical expenses as a 100% tax-deductible business expense.

What Does an HSA Cover?

An HSA covers a broad range of medical expenses. If the medical expense is provided by a qualified medical professional, it is likely covered in your HSA plan. More specifically, an HSA  covers all common expenses such as prescription drugs, dental and vision care, chiropractic treatments, physiotherapy, massage therapy, acupuncture, mental health services, and medical equipment.

An HSA does not cover strictly cosmetic procedures, over-the-counter medications without a prescription, or general wellness expenses like gym memberships.

For a complete list of eligible expenses, please visit our claim requirements guide. You can also refer to the CRA website for more details on approved medical expenses.

Am I Eligible to Set-up an HSA?

There are three types of businesses that are eligible to establish an HSA, Incorporated Individuals, Business with Staff, and Sole Proprietors, there are, respectively:

1. A corporation with no arms length employees;
2. A corporation with more than one arms length employees; and
3. A sole proprietorship or partnership with more than one arms length employees.

Due to the complexity of establishing an HSA as a sole-proprietor, Frontier HSA advises against sole-proprietors establishing an HSA. As a result, Frontier HSA does not offer HSAs to sole-proprietors at this time. (Stay tuned, we will in the future)

If you are incorporated you are eligible to establish an HSA, with the following stipulations:

Incorporated Individual: Must be actively working in the business and receiving T4 employment income.

Business with Staff: Annual contribution limits for employee classes must meet the definition of “reasonable limit.” More information on reasonable limits can be found in our contribution limits guide.

Key Takeaways:

A Health Spending Account (HSA) is a strategic choice for Canadian businesses seeking flexibility, simplicity and cost-effective health coverage. By reimbursing employees for actual medical costs rather than paying fixed premiums, businesses can better manage their budgets while ensuring employees receive comprehensive healthcare coverage. Whether you're a small business owner or managing a larger workforce, an HSA can be a smart financial decision that benefits both employers and employees.