Healthcare Spending Accounts

Introduction and Background:

Health plan spending accounts (HSA) and health care spending accounts (HCSA) are set up by the company for their employees. The company can set up these types of accounts with insurance companies or third party administrators (TPAs). An HCSA is like a bank account. The employee can use the funds in the account to pay for eligible health and dental expenses. Health plan spending accounts and health care spending accounts have also created confusion with a maze of Income Tax Changes and Bulletins by Canada Revenue Agency (CRA). The changes to these arrangements occur annually. Professional advice is needed to interpret and implement these changes on an ongoing basis.

The first health care spending account in Canada was introduced in 1986 called a health & welfare trust created by Canada Revenue Agency (CRA) Bulletin IT-85R2, called “Health & Welfare Trust for Employees”. Since their introduction and creation by Canada Revenue Agency (CRA) there have been a number of bulletins put out creating a variety of variations of HCSA’s and hybrid plans. These plans are referred to as private health services plans (PHSP) and health savings accounts (HSA). CRA Bulletins are not law and are subject to interpretations. This has created confusion for employers, employees and their human resources (HR) departments. To meet this demand a new industry was created third party administrators (TPAs) and benefit consultants.

A health spending account is a group benefit plan that provides reimbursement for eligible health care expenses. HSA's are administered in accordance with Canada Revenue Agency guidelines. In order to receive favorable tax treatment a health care spending account (HCSA) must qualify as a private health services plan (PHSP) as defined by subsection 248(1) of the Canada Revenue Agency (CRA) Interpretation Bulletin IT-339R (1998), meaning that it may only cover medical expenses as defined in subsection 118.2(2) of the Income Tax Act of Canada and must involve the transfer of a “reasonable degree of risk” to the insurer and/or employer. Insurance companies offer HSA’s with their group health & dental plans. You don’t need to be a large company to take advantage of their benefits. A company can combine different types of plans and accounts to provide more flexible benefits to its employees.

HSA’s provide coverage to the company's employees and their dependents. The eligible medical expenses are defined in the Income Tax Act of Canada. The definition of dependent is broader than the definition in traditional insurance company health and dental plans. There is more flexibility in the plan to claim medical expenses and medical services. HSAs can be used to pay for unpaid balances or expenses not covered under your provincial government healthcare plan (OHIP in Ontario), your or your spouse's insurance company group benefits plan. They can also be used to pay for balances not reimbursed on your or your spouse's insurance company dental and extended health care plans. Deductibles and coinsurance amount on your or your spouse's insurance company dental and extended health care plans are also eligible.

The list of eligible benefits is broader than what is covered with traditional insurance company health and dental plans. Eligible expenses include glasses, contact lenses, laser eye surgery, fertility drugs, erectile dysfunction drugs, psychologists, optometrists, acupuncturists, dental braces and hair transplants. For exact interpretations and a complete list of eligible expenses please visit the CRA web site. 

Maintaining medical receipts is required, according to the Income Tax Act of Canada Interpretation Bulletin No. IT-519R2, proper receipts must support all amounts claimed as qualifying medical expenses. A receipt should indicate the purpose of the payment, the date of the payment, the patient for whom the payment was made and, if applicable, the medical practitioner, dentist, pharmacist, nurse, or optometrist who prescribed the medication or provided the service. A cancelled cheque is not acceptable as a substitute for a proper receipt.

Benefits of Health Care Spending Accounts (HCSA)

1. 1. Allow for reimbursement of eligible health and dental expenses in pre-tax dollars.

   2. Eligible medical expenses are fully tax deductible by the employer.

   3. Provide a tax free benefit to the employee.

   4. Provide tax benefits to employees. Without a health care spending account (HCSA) the employee would have to pay for their medical expenses with personally with after tax dollars.

   5. Provide greater flexibility to the employer. HCSA can be structured without any increases to employer contributions.

   6. Costs are no longer driven by inflation but by internal budget considerations of the employer. Traditional insurance company group health and dental plans increase premiums annually with HCSA the premiums are set by the employer.

   7. Considerable saving to the Employer that have existing group health and dental plans when benefits are not used by employees or medical expenses are not covered in the benefits provided in the plan.

   8. Employer no longer needs to define benefits only the contributions. The employee has the flexibility to use it for the benefits they need.

   9. A health care spending account (HCSA) often leads to greater awareness and appreciation by the employees of the benefits provided by the employer.

   10. The only guideline the employee has to meet to qualify for reimbursement of medical expenses with a health care spending account (HCSA) is that of Canada Revenue Agency (CRA). For a complete list of eligible expenses visit the CRA Web Site.

The rules for contributions, fund rollovers and deductions are as follows:

1. In order to qualify for a health care spending account (HCSA) the plan need to satisfy Canada Revenue Agency (CRA) requirements to retain its non-taxable status, it must contain an element of risk. It is for this reason that unused balanced can only be carried over for 12 month and be used within a 24 month period.

2. Canada Revenue Agency (CRA) allows HCSA allocations (referred to as “credits”) to be carried forward 12 following the year they were granted by the employer. After a 24 month period if not used they are forfeited, however the employer can establish a carry-forward provision subject to the forfeiture rules. Canada Revenue Agency (CRA) does not allow for credits to be cashed out at any time.

3. Roll over of unclaimed expenses are subject to the same provisions and the roll over provision is only valid for 24 month.

Benefits of Using Our Services

Stone-Hedge Financial Group Inc. is not owned or operated by any insurance company or third party administrator. We work on behalf of our clients to provide cost effective and flexible group benefits for the company's employees.

There are many considerations to implementing an effective group benefit and employee wellness program. The most important is effective communications with employees. Stone-Hedge Financial Group Inc. will assist with effective communication, education and guidance to the company's employees.

Contact Us To Set Up a Healthcare Spending Account 

The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.