How to Choose the Best Health Spending Account for Your Company

What is a health spending account? A health spending account (HSA) offers employees a health “wallet” for them to use for expenses over and above their group insurance plan. In Canada, HSAs fall under Private Health Services Plans (PHSPs) under the CRA. In the States, accounts are called Health Reimbursement Arrangements (HRAs).

Examples of eligible medical expenses may include a prescription drug co-pay, crutches paid out of pocket after an injury, or medical services (like a dentist or a therapist) exceeding the amount of coverage in a group benefits plan.

HSAs can exist alone, or be combined with a traditional group-insurance. HSAs offer each eligible employee funds, up to a given amount, which the employee can use to cover medical, vision, dental, or other expenses. The employer controls how much money is in the HSA, and the employee chooses how to spend it. Most commonly, employers will offer a yearly maximum (say, $1000). The employer pays out eligible expenses as they’re claimed. If employees don’t use the full amount, the employer will keep it.

Coverage under an HSA isn't random and must comply with rules about eligible medical expenses under the Income Tax Act. Employers can narrow the list of coverage if they want to, but they can’t add non-eligible items like gym memberships or rental parking spots. Those would be taxable benefits. Similar structures exist in both Canada and the United States to make HSAs tax free for employees and tax deductible for the business.

How Do Employers Set Up a Health Spending Account?

Theoretically, a company could set aside money and offer employees an HSA, so long as it conforms to CRA/IRS rules. To get the tax benefits, though, the plan needs to be more formal, and should set out claims processing, tax reporting, reimbursements, recordkeeping, and what are considered eligible expenses (and what are not).

The most common way to set up an HSA is through a licensed HSA provider or benefits company. These third-party administrators can help you draft a pre-written and compliant plan document without hiring a lawyer. The HSA is administered through the company, and the company handles processing, reimbursements, recordkeeping, and reporting.

Choosing a Health Spending Account Provider

When comparing different provider options, it’s important to keep in mind the core function that the HSA performs for your company. HSAs can be used to:

• Cover medical expenses like dental or vision for a small company, in lieu of a group benefits plan
• Top up employee co-pays on top of a cheaper tier of benefits plan 
• Cover additional medical expenses over and above a benefits plan to give extra flexibility to your employees

Any of these (or other) use cases can change what you need from a plan. For instance, some providers charge a percentage per claim (usually around 5-10% per claim) while others charge annually. If you’re topping up on employee co-pays, you might choose an annual plan. If you’re a small contractor with a few employees looking for vision, orthodonic, or occasional use expense categories, you might find it cheaper to pay per claim.

Make sure to look at contract terms and hidden fees. HSA providers can lock you into a term commitment or charge extra for changes, like adding a new administrator. While extra benefits might be a good thing, be careful to select a provider that will show they’re 100% CRA or IRS compliant.

Good HSA providers that can tell you how eligible expenses are assessed, recorded, and paid, as well as what you’ll pay (and for how long). CRA and IRS compliant plans will never try to contravene the Income Tax Act or other regulation. When they’re done correctly, though, Health Spending Accounts can be a great, tax effective, and flexible way to share health care dollars with your team – or even save you money.