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.
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.
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.
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:
Expenses reimbursed through a Health Care Spending Account enjoy the same non-taxable status as benefits paid under a traditional health benefits plan, provided:
There are basically two options with respect to the carrying forward of unused credits from a Health Care Spending Account:
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.
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:
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