Health Care Spending Account

Sometimes referred to as a flexible benefit account, spending account or H.S.A., a health spending account allows an employer to allocate a pre-set amount of money to be used for medical reimbursement over and above the traditional health and dental benefit program.

During the year, employees and their dependents have access to this account for reimbursement of expenses such as: deductibles, co-pays, drugs, eyeglasses, laser surgery, smoking cessation programs, etc.

Amounts allocated to employees are done so on a tax-free basis allowing them to pay for medical and dental expenses using pre-tax funds.

Why implement a spending account?

We believe that a Health Spending Account is the most efficient way to increase the value and perception of a benefits program.

Health Spending Accounts are growing in popularity for a number of various reasons.  

  1. Employers who want to fund their benefit program with “defined contributions”.
  2. Employers who want to provide greater flexibility and choice to employees.
  3. Employers who want to provide benefit equity to employees.
  4. Employers who want to increase employee involvement in their benefits.
  5. Employers who want to provide enhanced benefits for a select class of employees.
  6. Provides employers with a convenient way to deliver compensation tax effectively.
  7. Non-taxable spending accounts are funded with corporate pre-tax dollars, (they are tax deductible to the employer).

We see many advantages in that corporately this type of plan allows you to offer employees maximum choice, while providing the employer with the ability to control costs.

In terms of controlling costs, the employer can carve out a portion of the total benefit plan cost and render it inflation proof through a Health Spending Account. The core components of your benefit plan will still continue to increase in response to utilization, inflation, and trend, but credits in the spending account can be changed at your discretion e.g. medical inflation rates, consumer price index, your return on investment, or any other basis that you deem appropriate. The advantage to this approach is that you have control over the rate of annual cost increases under the Health Spending Account.

How They are regulated

The single largest advantage to Health Spending Accounts is that it can allow health-related expenses to be paid on a pre-tax basis. That means employees can be given tax-free reimbursement for any eligible medical or dental expenses not covered under their insured plans.

Health spending accounts gain their favourable tax status provided they meet the definition of a “Private Health Services Plan” (PHSP) as defined under the Canadian Income Tax Act. The regulation of Health Care Spending Accounts depends on the Income Tax Act as well as Canada Customs & Revenue Agency Interpretation Bulletins.


Many different terms are used for spending accounts and there are different ways to establish this arrangement.

The most common type of account we see today is a Health Care Spending Account or Health Care Reimbursement Account. Under Health Care Accounts the insurer reimburses any item that qualifies under the Income Tax Act as eligible medical expenses.

The philosophy behind a Health Care Spending Account is different than that of a traditional benefit plan.  Usually more items are eligible under a Spending Account than under traditional group plans.  Examples of items eligible under the Income Tax Act that are normally excluded from a Group plan are as follows:

  1. The definition of dependent in the Income Tax Act is broader and can include dependent parents. (The definition of spouse however, might be more restrictive with respect to common-law couples. The insurer standard definition does not include a cohabitation period. Under the Income Tax Act, the couple must either have a child or have lived together for 12 months).
  2. Additional expenses such as those for travel to obtain medical services or the cost of a seeing-eye dog would be eligible.
  3. Employees are not bound by the internal maximums, as they would be in most group health plans. If they want to spend all of their Health Care Spending Account dollars on chiropractors and on prescription drugs, they may do so under this account.
  4. There is minimal adjudication – the carrier does a quick check to determine if it is an eligible item in accordance with CCRA.
  5. Patient history is not reviewed.
  6. There is no checking for ‘reasonable and customary’.

Expenses reimbursed through a Health Care Spending Account enjoy the same non-taxable status as benefits paid under a traditional health benefits plan, provided:

  1. Expenses reimbursed are eligible under the Income Tax Act (Section 118.2(2))
  2. The plan meets certain design criteria. There must be an element of risk to the employee.
  3. The employer must assign benefit credits prior to the year in which they are allocated.
  4. The allocation elected is irrevocable for the year, except for changes due to a familial change.
  5. The plan must be structured so that: The employee must use the dollars in the spending account in the calendar year they are received or forfeit them at year end (use it or lose it) i.e. employees must submit expenses for reimbursement within 30 days of the year end date.


There are basically two options with respect to the carrying forward of unused credits from a Health Care Spending Account:

Carry Forward of Unused Balances

Unused spending account balances can be rolled over for one year. The carrier handles this roll over automatically and tracks the current and prior balance separately. Claims incurred in the second year are paid from the prior year’s balance, to reduce the risk that this balance will be lost.

Claims incurred in the prior calendar year can be paid from the prior year balance only. For this reason, employees should submit expenses in the year in which they were incurred, or as soon as possible, but no later than 30 days after the year-end.

Expense carry forward

Unused spending account balances can be forfeited at the end of the year, but unused expenses would be carried forward. Let us clarify with an example. An employee has $700 worth of eligible expenses which exceeds the $500 allocated for the spending account in 2016. Under the expense carry forward provision, the employee would be reimbursed $500 from their spending account in 2016, and could use the $200 balance of expenses incurred in 2016 to be paid from their 2017 credits.

Examples of plans that do not qualify as non-taxable are:

  • Plans that pay out cash for unused spending account amounts.
  • Plans that allow the carry forward of claims expenses AND the carry forward of unused spending account amounts for the same calendar year.

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