Health Spending Accounts
Health Spending Account (HSA) is a tax-effective feature that complements an employee's regular benefit plan by providing them with additional choice for managing health-related expenses.
Each plan member has a separate account, and receives an allocation of Health Spending Account credits (dollars) each year. The amount, in the form of credits, is calculated in the same way for every employee (or class of employees)—either as a percentage of salary, a flat amount per employee or a combination of both. Each employee receives his or her own HSA account into which HSA credits are deposited on an established frequency (monthly, quarterly, etc.). These credits remain tax-free in Ontario for the plan member provided they are ultimately used to reimburse eligible health-related expenses.
Please Note: An HSA is a negotiated agreement between an employer and a specific employee group. Employees with an HSA will have received communications from their employers.
Throughout the year, plan members can claim reimbursements from their Health Spending Account to cover the cost of a wide variety of medical and dental expenses not covered by provincial health plans or their benefits plan. Any eligible medical expense that qualifies as a tax credit, as defined in the Income Tax Act, can be reimbursed directly from their Health Spending Account.
Examples of some of the eligible expenses allowable for reimbursement under an HSA are:
- Deductibles, co-pays, and other eligible expenses not covered by insurance.
- Payments to a doctor, dentist, or nurse, or to a public or licensed private hospital.
- Prescription drugs and medical supplies.
- Dental services, orthodontics, and dentures.
- Eyeglasses, contacts, solutions, and eye surgery.
- Payments for certain prescription medical devices.
- Chiropractic services.
- Psychiatric care and psychologist's fees.
- Smoking cessation programs.
Some of the expenses for modifying your home or motor vehicle to allow you (or a person for whom you can claim medical expenses) to be mobile and functional, can be claimed if you or the other person has a mobility impairment, or lacks normal physical development.
Transportation expenses for medical treatment may also be claimed.
When employees use tax-free dollars to pay for these expenses, they realize an increase in their spending power, and substantial tax savings.
WHY IS AN HSA TAX EFFECTIVE?
An HSA is funded by the employer, using pre-tax dollars—in the form of credits—that the employee uses to pay for eligible health-related expenses. Because no income tax is paid on these dollars, the purchasing power of a $600 HSA is actually $600.
Without an HSA, those health-related expenses must be paid by the employee in after-tax dollars; the real cost of $600 in purchasing power is closer to $857 [$857 - 30% tax rate* on $857 ($257) = $600].
*blended federal and provincial income taxes for illustration purposes only
There are three standard methods of managing an HSA plan as follows:
- Balance Carry Forward:
This method allows the employee to rollover any accumulated credits in year one to year two. However, any remaining balance would revert to the employer if it had not been spent by the end of the second year. - Expense Carry Forward:
Under this method credits can only be used within each year. Any remaining balance would revert to the employer at the end of the year. However, expenses from year one could be carried forward and claimed against the credits in year two. - No Carry Forward:
Under this method employees can only claim expenses against employer credits within that year.
HOW DOES IT DIFFER FROM A BENEFIT PLAN?
The Income Tax Act of Canada and Canada Customs and Revenue Agency (formerly Revenue Canada) establish the types of expenses eligible for reimbursement and the criteria for determining eligible dependents. In general, these definitions are broader for an HSA than for a traditional benefit plan (for example, an HSA allows an employee to cover health-related expenses for family members not considered dependents under their health and dental benefit plan but who qualify as dependents for income tax purposes).
As well, unlike many health and dental benefit plans, there is no provision for opting out of an HSA; all employees in the participating employee group must participate.
Please refer to the CRA Interpretation Bulletin to obtain a complete listing of eligible expenses allowable under a Health Spending Account.
NO.: IT-519R2 (Consolidated)
DATE: See Bulletin Revisions section
SUBJECT: INCOME TAX ACT - Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction
REFERENCE: Sections 64, 118.2, 118.3 and 118.4 (also sections 64.1, 118, 118.7 and 118.8; subsections
6(16) and 117(2) and paragraph 117.1(1)(b) of the Income Tax Act and section 5700 of the Income Tax Regulations)
