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What is an HCSA (Health Care Spending Account)?

A Health Care Spending Account (HCSA), also known as a Health Spending Account (HSA), is an individual employee account that provides reimbursement for eligible health care expenses or other benefits that are not covered under provincial health insurance plans or other benefit plans sponsored by the employer. A Health Spending Account can be implemented on a stand-alone basis within a traditional benefit plan or part of a flexible benefits plan.

Spending accounts can sometimes be the answer to situations where an employer wants to give employees increased involvement and more choice in their benefits while also limiting its financial responsibility. A health care spending account is a simple, tax-effective way to provide health and dental benefits flexibly. Through a Health Care Spending Account, employees can use pre-tax dollars to pay for expenses that would normally represent an out-of-pocket expense (except Quebec as contributions to all benefits are included in the employee’s income for tax purposes).

A HCSA can offer more flexibility than traditional plans as its scope of coverage is far broader than a typical benefit plan. In addition to expenses usually reimbursed, a HCSA can, for example, provide reimbursement for:
  • Cosmetic surgery
  • Prescribed over-the-counter medications
  • Home renovations when medically required
  • Home care
A HCSA can be used to pay deductibles, coinsurance, amounts in excess of benefit maximums and to broaden the scope of coverage of an existing plan. For example, a HCSA could cover:  
  • Professional services (e.g. chiropractor, physiotherapy) above the annual maximum
  • Medications not included in a plans drug formulary
  • Eye glasses and contact lenses if not covered by the existing plan or amounts in excess of the maximum if covered
  • Dental services that may not be part of the existing dental plan (e.g. caps, crowns, bridges, orthodontics)
  • Dental expenses above the plans annual maximum
Tax relief is one of the most overlooked factors when evaluating the value of an employee health benefit plan for small business. Health spending account is the name commonly in use in Canada, but is described in the Income Tax Act (ITA) as a Private Health Services Plan (PHSP).
Tax Deductions HSA Rules
Where a small business contributes premiums to PHSP, the small business is entitled to a deduction for the amount paid as a business expense necessary to earn income, as long as the amount is “reasonable.” Where a health spending account qualifies as a PHSP, the benefits received by the employee are not included in the employee’s income for tax purposes. In other words, Health expenses claimed by the employee using a health spending account are free of income and payroll taxes. $1 of value in “healthcare compensation” (in a health spending account), is equivalent to $2 of gross wage compensation. There are three principal requirements for health spending account (PHSP) under the income tax act (ITA) which are as follows –
  • Plan Of Insurance – The health spending account (PHSP) represents CONTRACT OF INSURANCE on insurance plan, In this case, it represents self-insurance by the small-business, promising to pay into the employee’s account an agreed-upon amount up to a maximum value (e.g $2500) for one year.
  • CRA Eligible Medical Expenses – The Canada Revenue agency health spending account covers only EXPENSES ELIGIBLE in the Income Tax Act for the Medical Expense Tax Credit (METC) and it covers hospital or medical care or expenses; and specifically  excludes provincial health insurance plans under the Canada Health Act, such as OHIP.HSAs are most often structured to permit employees to receive some level of reimbursement for medical expenses that still qualify for the medical expense credit but on a less restrictive basis than under a major medical plan. For example, a major medical plan may cover up to $500 worth of physiotherapy in any one year whereas, under an HSA which provides an employee with $2,000 worth of credits in a year, the employee can apply the entire $2,000 to physiotherapy services (from a qualified physiotherapist in the jurisdiction in which the services are rendered).
  • CRA Eligible Recipients Rules – The health spending account cover only ELIGIBLE RECIPIENTS as outlined in the Income Tax Act, defined as the employee, employee spouse or common-law partner, and other children and dependents.
A health spending account covers EMPLOYEES, not just the owners of a small business. If a health spending account it just covers the owners, CRA could assess that as a SHAREHOLDER BENEFIT and make this fully taxable.
How does a HCSA Works ?

Health Care Spending Accounts that are provided on a stand-alone basis are funded entirely by the employer. Each member of a class receives an equal allocation of funds from the employer. HCSA which forms part of a flexible benefits plan can be funded by both employer and employee contributions. Employee contributions are funded by “flex credits” rather than direct deposits. In the later case, employee contributions would have to be deducted from payroll on an after-tax basis, thus eliminating any tax advantage of having a HCSA.

The employee and their covered dependents use the HCSA to reimbursed eligible medical expenses,not covered by the employee or the spouse’s plan.The HCSA balance is reduced by the amount of each reimbursement.

Payments continue to be made until the account balance is zero. At the end of the year, any unused balance in the account can be carried over for one year, but unused funds in the account for more than two years are forfeited to the employer. Alternatively, unclaimed expenses for a given year can be carried forward for a year.

However, a plan can not include both a carry-over of the account balance and unclaimed expenses.

If you have any further questions, you can contact on Health Spending Accounts and how it can be implemented as part of your Employee Benefits, please contact us.

Deepak Jotwani  –

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