The Unique Advantages of Health Care Spending Accounts
These accounts can pay you back for qualified health care expenses
A health care spending account (HCSA), also known as a health spending account (HSA), is an employee benefit that offers reimbursement for eligible health care expenses. These accounts can help supplement existing coverage and fill in the gaps where public health insurance falls short.
What is a Health Care Spending Account and how do I qualify?
The public health care system in Canada offers coverage for most medical expenses but not everything. Many health care services, like dental or vision care, are not covered by the system, and some Canadians opt for private insurance to cover these costs. This type of private insurance is rarely a benefit an employer can offer, especially if they are a small business.
Instead, many Canadian employers offer health care spending accounts that reimburse employees for health care expenses not covered under the provincial health insurance plans. HCSAs allow employers to offer employees money to pay for out-of-pocket health care expenses, like dental services, eyeglasses, or hearing aids. Eligibility is generally determined by the employer, but an employee must work at least 20 hours a week to qualify.
How do HCSAs work?
HCSAs are typically offered by employers as either part of a benefits package or on a stand-alone basis. They also offer certain financial advantages. Employers fund HCSAs on a monthly basis, and the money they contribute to the account is tax-deductible. Withdrawals are tax-free for employees as long as they spend them on eligible medical expenses.
An employee’s access to the money left over in the account at the end of the year depends on the plan their employer offers. Employers typically have three options for handling unused balances, including:
- Balance carry forward. With this plan design, unused balances at the end of the first year can be carried over, but unused funds left in the account for more than two years go back to the employer. This option allows employees to plan for large medical expenses over a two-year period, giving them ample time to use their HCSA funds.
- Expense carry forward. This option allows for expenses that remain unclaimed at the end of the benefit year to carry forward and be reimbursed with the next year’s funds. Unused funds, however, are returned to the employer at the end of the benefit year. This option offers employees flexibility, especially if they incur a large unexpected medical expense.
- No carry forward. This is essentially a “use it or lose it” design that does not allow unused balances or expenses to be carried over into the next benefit year. For employers, this plan design is straightforward and simple and works well as a one-time benefit or reward for employees.
What medical expenses are eligible for a HCSA?
Employees do not have to pay taxes on withdrawals for eligible medical expenses. The Canada Revenue Agency (CRA) determines what is considered an eligible expense, such as:
- Vision care, like eyeglasses, contact lenses, or laser eye surgery
- Prescription drugs not usually covered by Extended Health Care plans, such as fertility treatments
- Massage therapy
- Adult orthodontics
There are some medical-related expenses that aren’t covered, such as:
- Premiums for public health services
- Services from nonqualified medical practitioners
For a complete list of eligible expenses, visit the CRA website.
A HCSA offers tax benefits to employers and flexibility and freedom to employees, allowing them to pay for medical expenses not covered under their provincial health insurance plan. If you have any questions about your plan, contact your employer.