HSA Advantage #2 – Tax Savings

Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…

HSA Advantage….

Tax savings.  I wasn’t going to add this to my blog as I assumed everyone understood this as a benefit by now.  But in thinking about my posts, I wanted to ensure everyone had clarity on ALL of the benefits of a health spending account, so here we go…

When an incorporated business opens a health and welfare trust (HWT) for one employee or numerous employees, the total amount (including the administrative fees) becomes an eligible business deduction for the company – just like paper for the copier, pens, staples, or materials.  It comes off the books as an expense and the impact on taxes would be the same as any other accepted expense.

For sole-proprietors, the contributions are also an eligible expense.  If it is one individual with no employees, the amount deposited into their private health services plan is  declared on their annual return.  In almost all cases, the amount provides greater tax relief than the standard medical tax credit they would traditionally apply for.  For groups, the amount deposited into each employees health and welfare trust would be considered a straight deduction similar to incorporated entities and declared along with the owner’s PHSP on their annual return.

Another opportunity for tax savings is related to salary and total compensation.  Some companies incorporate an HSA into the total compensation of their employees by amending the salary to include an amount to be deposited into a Health and Welfare Trust.  For example, if an employee earns $80,000 and they agree to receive a portion in HSA contribution (say $10,000/year), the employees taxable income would reduce to $70,000 and they would receive $10,000 in tax-free earnings into their HSA.  The benefit for the employer is that the $10,000 becomes a business expense and the source deductions owed by the employer on behalf of the employee would be reduced from a percentage of $80,000 to one of $70,000.

Either way, the key tax savings benefit is that the HSA allows you to pay for your expenses in pre-tax dollars as opposed to after tax dollars.

Buyer Beware #1 – HSA Fund Ownership

In recent years, I have seen a growing number of Health Spending Account solutions appear in the market.  Some are great and I applaud those providers who have done their research and developed a product that is respectful of the interpretation bulletins published by Canada Revenue Agency (CRA).  However, a growing number of companies have entered the market in recent years looking to make a quick buck without truly investing in their knowledge of the product.  To help, I thought I would start a new blog series…. items you should look for when choosing an HSA provider…

Unused Funds Being Returned to Company

Canada Revenue Agency is pretty clear on this issue - funds can NEVER revert back to the employer.  The only time this can happen is when an HSA is used in a notional credit program combined with a flexible benefits plan.  If you are working with a supplier and they allow you to take back unused funds from an employee if they quit, then you should re-evaluate your choice of supplier.  Many of the new suppliers have taken the rules outlined in CRA bulletin IT-529 Flexible Employee Benefit Programs, and confused them with the guidelines outlined in IT-339R2 Meaning of Private Health Services Plan. 

The guidelines outlined in the later bulletin, and to an extent those outlined in the original IT-85R2 Health and Welfare Trusts for Employees, are truly the best bulletins to follow regarding PHSPs and HWTs.  The information in IT-529 is related to flexible benefit programs and provides an overview of how to account for benefits using a notional credit program.  A notional credit program supports flexible benefits or cafeteria plans – common in many large corporations.  Running a flexible benefits program using notional credits uses an HSA (in the form of a PHSP) in addition to a core plan offering varying levels of coverage for the employees to choose – traditionally as part of an annual election process.

In summary, funds can ONLY revert back to the employer if the program is part of a notional credit arrangement supporting a flexible benefits program.  They belong to the employee! If you have a Private Health Services Plan or Health and Welfare Trust where the supplier allows you to take back the money if an employee is terminated or leaves…..buyer beware!