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Health Spending Accounts

An alternative to a formal group benefit plan is to use a Health Spending account for your health and dental expenses. These accounts were first introduced by Canada Revenue Agency (CRA – formerly Revenue Canada) in 1986 and allowed the self-employed business person and companies to make deposits for use in reimbursing Health expenses. Insurers offer Health Spending accounts as add-ons to their traditional group plans or you can arrange a Health Spending account as a standalone plan.

Employer contributions to a HSA is not deemed a taxable benefit and claims are paid on a tax-free basis. The HSA basically works like a bank account that you can draw on to reimburse your Health-related expenses on a tax preferred basis. You can use it to replace a formal benefit plan or to pay for items not covered by the benefit plan, as a sort of top-up. HSA’s can be set by class, seniority or salary and offer flexibility to the employer while maintaining a steady cost.

The advantages of a Health Spending Account are:

  • Flexibility for tailoring the amount of coverage funds by employee category
  • Definition of dependent uses CRA definition which includes children (natural, adopted, commonlaw
    partners), parents, grandparents, siblings, aunt, uncle, niece or nephew, with no age restriction as long as they are financially dependent on you.
  • Funding amount can be changed every year
  • Balances can be carried forward
  • Pre-existing conditions are covered
  • Catastrophic insurance coverage can be added to pay for unexpected large claimsNo preset plan design, all expenses allowable under CRA rules can be reimbursed up to 100%.
  • Eligible expenses are much expanded over a typical benefit plan including testing, treatment and
    tutoring for children with special needs, homeopathic medication or supplements prescribed and distributed by a naturopath, cost of a long term care facility for a eligible dependent.

Disadvantages:

  • Unincorporated business owners have some limit on the amount of the account, no carry-forward of
    expenses after 2 yrs and contributions are pro-rated by calendar year.
  • Fund allocation cannot be changed mid-year
  • Funds that are left in the account do not incur interest
  • Once funds are in the account, they can only be withdrawn through the reimbursement of expenses
  • The fund allocation must be deemed reasonable by CRA ie. No depositing $100,000 to avoid tax

Whether as a supplement to an existing benefit plan or to take the place of a traditional plan, Health Spending Accounts offer some unique advantages for providing meaningful coverage to employees.

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