A Brief Discussion: Understanding Health Care Savings Account

Written by Wendy Martin of Wendy Martin Financial Services Inc. Wendy is a Strategic Partner with Keill & Associates working with clients in the area of Group Benefit Programs.

Overview

Health Care Spending Accounts (HCSA) have become a popular alternative to traditional group health and dental plans. They are practical, affordable, flexible, and a cost-effective way to meet the changing needs of many employers and employees. Many employers are considering HCSAs as an alternative when reviewing or initiating their employee benefits plan. It is important to take the time to understand the ins and outs of HCSA, to determine if they are an appropriate solution.

What Is a Health Care Spending Account?

A Health Care Spending Account is a pre-determined amount of money provided to employees, by their employers, at the beginning of each benefit year, for coverage of their medical and dental expenses. Over the course of the year, claims are submitted by employees and reimbursed in a similar fashion to a traditional benefits plan. Eligible expenses are reimbursed at up to 100% of the total dollar amount remaining in their HCSA. A Health Care Spending Account can replace or exist alongside traditional medical and dental coverage. Health Care Spending Accounts ensure controlled benefit costs for the employer, and complete claim flexibility for the employees.

How Does a Health Care Spending Account Work?

At the beginning of each benefit year, the plan sponsor (usually the employer) determines the amount of HCSA dollars that will be available for each employee to spend. This is often determined by class of the employee. For example, Executives could receive $10,000 per year, Managers could receive $5,000 per year, and all other employees $1,000 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 throughout 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 traditional benefits plan. This flexibility and control are particularly attractive to the younger demographic and can be a very useful tool for the employer in attracting and retaining top talent.

Which Expenses Are Eligible for Coverage?

Under the Income Tax Act, any item that qualifies for the Medical Tax Credit is eligible for coverage under an HCSA. Often this definition of eligible expenses is broader than that of a traditional employee benefits plan, allowing for additional flexibility for employees and executives.

What Are the Tax Advantages for An Employer?

Health Care Spending Accounts provide a way for plan sponsors to deliver benefits to their employees, using pre-tax dollars. As with a traditional employee benefits plan, the costs are tax deductible business expenses, and the benefits are received tax-free. This can be a significant advantage for owners, executives, and key employees to pay for significant medical and dental expenses with corporate dollars in the most tax-effective way possible. To be considered a tax-deductible expense to the plan sponsor, a Health Care Spending Account must have a pre-set limit, which is 100% employer funded. The reimbursement is limited to the amount that has been allocated to the account by the employer and to the eligible expenses defined in the Income Tax Act. Unused HCSA amounts cannot be paid out at the year-end as cash to the employees, although may be carried forward for a period of not longer than one year.

How Are Health Care Spending Accounts Funded?

Under the terms of the Income Tax Act, to qualify as a tax-deductible expense to the company, HealthCare Spending Accounts must be fully funded by the employer. There are several options when it comes to funding. Amounts can be billed monthly, as a lump sum payment at the beginning of the benefit year, or paid as employee claims come in. The best approach will depend on the size of the group and the budget for the HCSA. Some employers prefer the predictability of the budgeted approach, while others want only to pay expenses as they come due. Employee expenditures cannot exceed the HCSA maximum set by the plan sponsor and, therefore, employer costs cannot exceed the total employee HCSA amounts, plus administration costs and taxes. There is never an annual increase in HCSA contributions unless the employer chooses to change the total HCSA dollar amounts available to the employees. This predictability of costs is one of the biggest advantages of a Health Care Spending Account.

How Are Unspent Allocated Funds Dealt With?

If an employee has a remaining balance at the end of year one, the funds may be carried forward and added to their balance for year two, at the option of the employer. This allows the employee to plan and budget for large expenditures, like orthodontic expenses, over a two-year period. Once an employee has exhausted their full HCSA balance, any additional expenses they may have remaining cannot be carried forward to the next year under the Income Tax guidelines. Health Care Spending Accounts and Insurance Health Care Spending Accounts provide no “insurance” coverage. HCSAs are strictly a reimbursement plan. Traditional insurance products, like group life insurance, accidental death and dismemberment insurance, critical illness insurance, and out of province emergency medical coverage can be added to an employer sponsored benefit plan offering. Many employers also add stop loss insurance protection to pay for medical expenses that exceed a certain pre-determined threshold. This helps plan sponsors protect employees and their families from unexpected catastrophic medical expenses that may occur in a given year, such as high-cost prescription drugs.

Plan Design Considerations

Just as with traditional benefit plans, plan sponsors may assign varying levels of benefit by class within their group of employees. HCSA plans may be structured in one of three ways. These designs are mutually exclusive and cannot be combined within a plan. The most popular method is Balance Carry Forward, which permits employees to roll over any remaining credits from year one to year two. Employers should expect that employees might claim their full Health Care Spending Account balance each year. Employees are aware of their balance on an ongoing basis which can encourage “using up” credits available to them. It is at the discretion of the employer to allow the Balance Carryforward of benefits if not used. In some cases, employees who would normally be restricted by the limits in a traditional plan (i.e., $200 for vision care) may spend more as their entire claim would be eligible (i.e., $400 pair of glasses). Overall, however, employees are limited to their annual Health Care Spending Account balance.

In Summary

For the plan sponsor, who decides how much to spend when setting up the plan, and the employees who decide where to spend their benefit dollars when submitting claims, an HCSA allows choice on every level. Health Care 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. Many employers are looking for creative ways to control their health and dental expenditures. a Health Care Spending Account can be the ideal solution.

To find out more about Health Care Savings Accounts or to book a consultation with our Team or Wendy Martin, please contact our office.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Jan 29, 2025