Healthcare spending Accounts (commonly referred to as HCSA or HSA) are an increasingly popular alternative to conventional group health and dental plans. They are practical, affordable, flexible and a cost-effective way to meet the changing needs of many employers and diverse needs of many employees.
What is a Healthcare Spending Account?
A Healthcare Spending Account is a pre-determined amount of money provided to employees at the beginning of each benefit year for coverage of their medical and dental expenses.
Claims are submitted by employees and reimbursed in a similar fashion to a conventional benefits plan. Eligible expenses are paid at 100% up to the total dollar amount available in the HCSA. A Healthcare Spending Account can replace or exist alongside conventional medical and dental coverage.
How Does a Healthcare Spending Account Work?
At the beginning of each benefit year, the plan sponsor decides the amount of HCSA dollars available in each employee’s individual account (normally by class of employee). For example, Executives could receive $3,600 per year and all other employees $1,200 per year.
Employees and their families can then claim from these accounts to cover Canada Revenue Agency (CRA) approved health and dental expenses, which they encounter through the benefit year. This allows employees to spend the funds on expenses their families incur, rather than restricting them to the dollar limits and specific expenses set out in a conventional benefits plan.
Tax Advantages for the Employer
As with a conventional employee benefits plan, the cost of an HSA health plan is a tax deductible business expense, and the benefits are received tax-free. To be considered a tax-deductible expense to the plan sponsor, a Health Care Spending Account must be a pre-set limit, which is 100% employer funded. The funds cannot be used to purchase additional insurance (i.e. Life Insurance). Unused HCSA amounts cannot be paid out at year-end as cash to the employees.
Healthcare Spending Accounts provide employers with complete control over claims costs each year, because the employees can only claim up to their individual maximums. Funds that are not used for claims within the specified time period remain the property of the plan sponsor and will be returned to them.
Eligible Expenses under a HCSA
Under the Income Tax Act, any item that qualifies for the Medical Tax Credit is eligible for coverage through an HCSA. The best way to ensure that you are compliant, is to refer to the CRA Website which includes a complete listing of eligible expenses.
The most common expenses that are covered include:
- Vision Care
- Health Practitioners
- Prescription Drugs
- Laser Eye Surgery