If you are a shareholder of a Canadian Controlled Private Corporation (CCPC), have employees with or without health coverage, and looking for a way to save overall taxes, then this article may be for you.
With health care costs increasing every year, an entrepreneur reader emailed me to ask about the Health Spending Account (HSA). The HSA is basically a registered account with a CCPC that allows an employee of that company to receive tax free health benefits. In addition to the tax free benefit to employees, the company funds the HSA with pre-tax dollars, which means there is 0% tax paid overall on the health benefit.
What are the Benefits
A funded HSA can be used by employees, their spouses and their dependents towards medical or dental expenses. It can be used in conjunction with health insurance to cover the deductible or as a stand alone benefit. Putting my employee hat on, I can see this as a real perk, especially since it’s a tax free benefit, in other words, free money! In addition, if the health insurance plan is on the lighter side (ie. no orthodentic coverage), then the HSA can be used providing the expense qualifies as a medical expense under the Income Tax Act (link).
Switching back to the entrepreneur, not only does this add an extra incentive in the employee pay package, it has the benefit of using pretax corporate dollars.
One thing to note is that the HSA can only be used for real employees, and not just shareholders. If my online company is still around when my kids get older, I will be looking into the HSA to pay for orthodontic work (ie. braces) or other big ticket health items.
How is it Used?
The employer sets up an HSA for each employee and funds the account at their discretion (no maximum). If the employee does not use all the credits in the account, it can be carried forward (with restrictions). Claiming using the HSA should be relatively straight forward as well. On most insurance claim forms, they’ll have a section for the HSA details.
The one drawback that I could find from using the HSA is that since it’s a registered account, claims are required to run through a third party which leads to extra fees. When the HSA is used as a standalone account (ie. not for paying the insurance deductible), the third party services out there charge a setup fee and another fee equivalent to 5%-10% of the claim. Fortunately though, the fees are paid for by the company and are tax deductible.
I couldn’t find the fees that insurance companies charge to cover the deductible, but i’m willing to guess that they charge about 10% to process the HSA claim.
Drawbacks aside, I think the HSA is a great tool that isn’t talked about enough. With medical expenses on the rise and health insurance policies covering less, companies can fund the HSA using pre-tax revenue to fill the gap and add real tax-free value to employees.
Do you have a Health Spending Account benefit at your work place? If so, I’d like to hear about your experiences.