A Health Spending Account (HSA) is a simple alternative to traditional health insurance.  It can include both medical and dental and the benefits are completely tax-deductible to the employer. An HSA can also be called Health Care Spending Account (HCSA) or Private Health Services Plan (PHSP), but they are all essentially the same concept.  An HSA applies to either a small business owner with staff or an incorporated individual. 

For the small business, it must employ staff and the staff must be classified as arm's length.  The CRA terms ‘arm's length’ when people are not related and have separate interests.  So, a spouse or child employed by a small business is not at arm's length. 

If your business qualifies, you can offer HSA as an alternative to a traditional health insurance benefit.  For you, there are no premiums but the program can be customized and is easy to manage.  For the employee, it is a tax-free benefit with flexibility and good health care coverage.

Here is how it works:

The employer categorizes employees (management, executives, full time vs. part-time) and then declares a spending limit for each category.  The plan is funded by the employer in a pre-determined monthly amount.  As the employee needs medical attention, he or she pays for the service on their own but then makes a claim against the HSA and is reimbursed tax-free up to the limit established for their category.  The employee gets to choose which claims to submit for reimbursement.  Any unused funds are returned to the employer.  Neither party pays any premium or deductible.  The employer does pay an 8% fee for the administration of the accounts. 

The employer knows how much the benefit will cost upfront.  If the employee makes no claims, the employer doesn't pay out anything, including any unused portions of benefits.  Except for the administrative fee, it is free.  The employer also avoids listening to employees mutter about how the benefit could have been better allocated.

The employee gets to use the money as they choose toward any medical or dental expenses.  So, if they have ongoing and expensive medication needs, they will be happy; or if orthodontia is looming, they can apply for the benefit there.  For those individuals with health conditions, there is no worry about being excluded for a pre-existing health issue and there is no age limit.  The downside is that HSAs are geared toward routine expenses rather than a catastrophic event. 

In the long run an HSA is a good plan for a small business since it offers a medical benefit and the employees get to choose how to allocate the money, resulting in more flexible coverage than a traditional plan. Plus the cost is minimal. However, before setting this up, it is a good idea to discuss the plan with your accountant. He or she may have some ideas you hadn't considered, plus they should be very familiar with your current tax burden and the amount of benefit you will derive from an HSA.

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