Benefits of a Health Spending Account (HSA) for Incorporated Small Business Owners

As an incorporated small business owner in Canada, managing healthcare expenses effectively can significantly enhance your financial efficiency. One of the most common tools available to achieve this is the Health Spending Account (HSA). This vehicle is not only a cost-effective way to manage medical expenses but also offers valuable tax advantages.

What is a Health Spending Account?

A Health Spending Account (HSA) is a type of private health plan that incorporated businesses can use to cover a wide range of medical expenses that are not covered by Manitoba public health insurance. It functions as a tax-free fund where your corporation can reimburse you or your employees for medical expenses incurred, effectively using pre-tax dollars to cover these costs.

Coverage extends to Dependents

Health Spending Account (HSA) extends its benefits to cover the medical expenses of your dependents, enhancing the value it provides. This inclusion means that not only can business owners and employees claim reimbursements for their own health-related expenses, but they can also do so for their family members such as spouses, children, or other dependents recognized under the plan. This feature adds a layer of financial protection and peace of mind, knowing that the health care needs of one's entire family can be managed cost-effectively under the business's umbrella, using pre-tax dollars.

Tax Efficiency

For incorporated small business owners, the primary benefit of an HSA is its tax efficiency. The contributions made to an HSA are fully tax-deductible as a business expense for your corporation. This not only reduces the corporation's taxable income but also bypasses the personal taxes that an owner or employee would typically pay on their income prior to paying for the medical expenses with their after tax dollars.

In the context of personal tax returns, to claim medical expenses, an individual must spend more than 3% of their net income (up to a maximum of $2,759 for the year 2024—whichever is less). This threshold often limits the practical utility of claiming medical expenses directly on personal tax returns, especially for those with modest medical costs. By contrast, a Health Spending Account (HSA) effectively circumvents this limitation. With an HSA, business owners can convert their medical expenses, as well as those incurred by their dependents, into corporate expenses. These are fully deductible from the first dollar spent, without needing to surpass a percentage threshold of income. This shift not only simplifies the process but maximizes the financial benefits by ensuring that every dollar spent on health care reduces the corporation's taxable income immediately and directly.

Employee Attraction and Retention

In addition to the benefits discussed above, offering an HSA to your arms length employees can be a significant perk for them. It enhances the overall compensation package and can aid in attracting and retaining talent. Employees gain access to flexible and tax-free medical benefits, which can increase job satisfaction and loyalty—an invaluable advantage in today’s competitive labor market.

What Medical Expenses are Eligible:

You can use your Health Spending Account to cover expenses that are eligible medical expenses under the Income Tax Act (Canada) and that are not paid (or not paid in full) by any other private or government plan. These include eligible expenses incurred outside your province of residence.

How Much Can be Reimbursed per Year?

CRA guidelines state that HSA contribution limits must be "reasonable," though the term is subject to interpretation. Currently, the HSA industry in Canada generally agrees that a reasonable maximum contribution per employee is about $15,000 annually. This amount is available to the entire family, allowing any family member to utilize the full amount as necessary. For HSA purposes, "family" refers to the employee’s immediate family, which includes the employee, their spouse, and any dependent children.

It should be noted that a business owner needs to receive a salary and be issued a T4 slip from his corporation to qualify for a Health Spending Account. If the spouse is also employed by the business and receives a salary, the limit effectively doubles, as both the business owner and their spouse can each access the $15,000 HSA limit.

Process for Using the HSA:

The procedure for utilizing a Health Spending Account (HSA) as a business owner or employee involves several steps: Initially, you personally incur and pay for medical expenses, which can include costs for yourself, your spouse, or dependents. Following this, you submit these expenses for reimbursement via the HSA provider's portal, such as Olympia Benefits. The HSA provider then verifies that the expenses are eligible medical expenses (as defeined by Income Tax Act). Once the expenses are confirmed as eligible, the HSA provider requests funding from your corporation, including any applicable administrative fees. After receiving the funds from your corporation, the HSA provider processes and issues a reimbursement to you. This process generally takes between one to two business days.

Cost of Maintaining a HSA Account:

Cost varies depending on the HSA Provider. As an example Olympia Benefits offers the basic HSA for incorporated small business owner for $ 249 per year.

If you are interested in setting up a Health Spending Account (HSA) for your corporation, please consider using our affiliate link to make your purchase. This helps support our content while enabling you to maximize your healthcare benefits efficiently.

Please contact our office if you have any questions or would like to discuss whether a Health Spending Account (HSA) is the right solution for your corporation.

Jenkyns Smith CPA's LLP - Olympia Benefits affiliate link:

Health Spending Accounts for Small Business Owners in Canada (olympiabenefits.com)

Try our HSA Cost Benefit Calculator (currently in BETA) to see how much you can save by using a HSA through your corporation: HSA Benefit Calculator | Jenkyns Smith CPA's