Health Spending Accounts: Tax-Efficient Health Expense Management

What is a Health Spending Account (HSA)? | Life Insurance Questions Answered

Understanding Health Spending Accounts (HSAs): Your Guide to Tax-Efficient Health Expense Management

Navigating the complexities of health-related expenses can be a challenge for business owners and professionals. One effective strategy to manage these costs in a tax-efficient manner is through a Health Spending Account (HSA). In this comprehensive guide, we’ll explore the ins and outs of HSAs, how they work, and why they are an essential tool for any corporation looking to optimize their health expense management.

What is a Health Spending Account (HSA)?

A Health Spending Account (HSA) is a Canada Revenue Agency-approved method that allows personal qualifying medical expenses (such as health, dental, vision, massage, and chiropractic care) to be paid for in a tax-efficient manner. Essentially, your corporation can write off 100% of all qualifying medical expenses, and these expenses incurred by an employee and their family can be reimbursed tax-free.

I personally use an HSA for myself, and most of my professional clients have one as well, including accountants who specialize in tax. It was actually one of these accountants who introduced me to the concept back in 2015, highlighting the significant tax benefits and flexibility it offers.

The Importance of Compliance

As a shareholder, it’s extremely important to ensure that an HSA is not viewed as a shareholder benefit. One important aspect is that you are earning a T4 salary from your corporation. The CRA issued a bulletin in 2019, warning those who are not incorporated or paying themselves a salary. To comply, we need to decide on an acceptable allowance for the overall plan, typically 10%-15% of one’s pay. If T4 income is minimal, it’s recommended to set the allowance at 10-15% of what a fairly compensated employee would earn in such a role.

Structuring a Health Spending Account

There are several ways to structure a Health Spending Account. The method that I and the majority of my clients prefer is the “pay as you go” method. This approach means there are no costs associated with the plan unless a claim is made. The full claim amount, including the fee and tax, is deductible to the business. Other plans in the market may have start-up fees, annual fees, or require pre-funding the account. These additional costs are advantageous for the broker but not for the client.

Understanding Health Spending Accounts (HSAs) | myHSA

Health Spending Accounts (HSAs) offer a tax-efficient way to manage health-related expenses. By allowing corporations to write off 100% of qualifying medical expenses, HSAs provide significant savings and flexibility. The ‘pay as you go’ method, with no associated costs unless a claim is made, is particularly beneficial for business owners and professionals.

How Does an HSA Work?

When a health-related expense is incurred, the process of claiming through an HSA is straightforward:

  1. Submit the Claim: The employee (or business owner) pays for the medical expense out of pocket, takes a picture of the receipt, and submits the claim via a mobile app.
  2. Reimbursement: The corporation pays the claim amount plus an administration fee. This fee covers the administrative and compliance services required for the benefits to be paid non-taxable.
  3. Tax Deduction: The full claim amount, including the fee and tax, is deductible to the business, providing significant tax savings.

Example of Savings with an HSA

Consider a small business owner based in Ontario, earning $120,000 annually with a marginal tax rate of 43.41% and incurring about $3,000 in medical expenses per year:

  • Without an HSA: The company must pay $5,301.29 to provide the owner with $3,000 for medical expenses (due to the taxes on income).
  • With an HSA: The company pays $3,000 for the expenses and $645 in taxes and admin fees into the HSA, resulting in a total corporate expense of $3,645.

In this example, the corporation saves $1,656.29 by utilizing an HSA.

Benefits of a Health Spending Account

Health Spending Accounts provide several key benefits for business owners and their employees:

  1. Tax Efficiency: By allowing businesses to write off 100% of qualifying medical expenses, HSAs significantly reduce the taxable income of the corporation.
  2. Flexibility: HSAs can cover a wide range of health-related expenses, including dental, vision, massage therapy, and chiropractic care.
  3. Ease of Use: With digital platforms and mobile apps, submitting claims and managing HSAs is straightforward and convenient.
  4. Cost Savings: The “pay as you go” model ensures that there are no upfront or annual fees, making it a cost-effective solution for businesses.

Important Considerations

While HSAs offer many advantages, it’s essential to keep a few considerations in mind:

  • Compliance: Ensure that the HSA is structured correctly to avoid being viewed as a shareholder benefit.
  • Allowance: Set a reasonable allowance for the plan, typically between 10%-15% of one’s T4 salary.
  • Provincial Tax Rules: Different provinces have different tax rules, so it’s very important to ensure the HSA you choose accounts for the taxation rules in your province.

Choosing the Right HSA Plan

When selecting an HSA plan, it’s important to consider the following:

  • No Hidden Fees: Opt for a plan that operates on a “pay as you go” basis with no hidden start-up or annual fees.
  • Digital Claim Submission: Choose a plan that offers digital claim submission through a mobile app for convenience.
  • Administrative Support: Ensure the plan provides robust administrative and compliance support to handle the non-taxable benefit requirements.

Why Choose a Health Spending Account?

Health Spending Accounts (HSAs) are a powerful tool for business owners and professionals looking to manage health-related expenses in a tax-efficient manner. By allowing corporations to write off 100% of qualifying medical expenses and providing a flexible, user-friendly system for submitting claims, HSAs offer significant benefits and cost savings. If you’re considering an HSA for your business, consult with a professional advisor to ensure compliance and maximize the advantages.

At SecurePlan, we specialize in helping businesses implement effective health spending account strategies. Contact us today to learn more about how an HSA can benefit your business and ensure a tax-efficient approach to managing health expenses.

Disclaimer: This article provides general information and readers should seek personalized advice from legal, tax, and financial professionals. Health Spending Accounts can be complex and vary greatly depending on individual business and family circumstances.