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 to be paid for in a tax-efficient manner. These expenses can include health, dental, vision, massage, and chiropractic services. With an HSA, your corporation can write off 100% of all qualifying medical expenses. The most significant advantage is that qualifying medical expenses incurred by an employee and their family can be reimbursed tax-free.
The Benefits of a Health Spending Account (HSA)
An HSA offers a host of benefits, especially for small business owners and incorporated professionals. It’s essential to note that you must be viewed as an employee and not just a shareholder to take full advantage of an HSA. This is why incorporation and paying yourself a bit of T4 income is vital. If you have employees, you might consider extending coverage to them as well. An added flexibility is that you can establish different employee classes with varying amounts of coverage.
How Does the Health Spending Account (HSA) Work?
The administration of an HSA can vary from one company to another. However, the best plans typically operate on a Pay-As-You-Go basis, where there are no mandatory monthly or annual premiums. You only pay when a claim is submitted. When an expense is incurred, the corporation pays the claim amount plus an administration fee. The HSA fee covers the administrative and compliance services necessary to ensure that the benefits are paid non-taxable. Modern HSA providers often offer a fully digital experience, allowing you to submit claims easily via a mobile app.
“A Health Spending Account (HSA) is a Canada Revenue Agency-approved method for paying qualifying medical expenses in a tax-efficient manner. By allowing your corporation to write off 100% of these expenses and reimbursing them tax-free, an HSA provides significant savings. It’s extremely important to establish this when you’re in good health and understand provincial tax rules to maximize benefits.”
Incorporating an HSA into your financial planning can provide substantial savings and ensure you are prepared for medical expenses. Take the time to understand how a Health Spending Account can benefit you and your business today.
Example of Health Spending Account (HSA) in Action
Let’s consider a practical example:
- Small business owner, married, with two children
- Based in Ontario
- Drawing a $120,000 salary a year (43.41% Marginal Tax Rate)
- Averages about $3,000/year in medical expenses
Without an HSA:
The company must pay you $5,301.29 to net $3,000 after taxes to cover medical expenses. Thus, the total corporate expense would be $5,301.29, accounting for $2,301.29 in tax on the income paid to yourself.
With an HSA:
The company directly pays $3,000 for the expenses and an additional $645.00 in taxes and administration fees into the HSA, totaling $3,645 in corporate expense.
In this scenario, the corporation saves $1,656.29 by using an HSA.
The Process of Submitting Claims with a Health Spending Account (HSA)
The process for submitting claims through an HSA is straightforward. The business owner pays for the medical expenses out of pocket, takes a picture of the receipt, and submits the claim via the mobile app. The system automatically withdraws money from the corporate bank account (along with the admin fee/taxes) and reimburses the employee by depositing the funds back into their personal account. The business owner can then download a report for their accountant to deduct the medical expenses.
Consider Provincial Tax Rules
It’s important to note that different provinces have varying tax rules. Ensure that the Health Spending Account you choose correctly accounts for the taxation policies in your province. This ensures compliance and maximizes the tax benefits associated with your HSA.
Final words
A Health Spending Account (HSA) is a powerful tool for managing medical expenses in a tax-efficient manner. By allowing your corporation to write off 100% of qualifying medical expenses and reimbursing these expenses tax-free, an HSA offers significant savings and benefits. It’s particularly advantageous for small business owners and incorporated professionals who can plan their finances more effectively. Understanding the workings of an HSA and how to leverage it properly can lead to substantial financial benefits and peace of mind.