BeneFitsMyWay Blog

Health Spending Accounts are considered to be Private Health Services Plans under the Income Tax Act

By Tammi Byers, Director of BeneFitsMyWay on Feb 27, 2023 3:00:18 PM |

Share:

TaxBlogPostPhoto-1

BeneFitsMyWay administers Health Spending Accounts (HSAs),which are considered to be Private Health Services Plans (PHSPs) under the Income Tax Act.

HSA Eligibility

Private Health Services Plans (PHSP) are available to incorporated Canadian businesses. However, there are several factors that determine eligibility and those may differ depending on the structure of your business. We do our best to interpret the guidelines surrounding the eligibility of the plan, but it is ultimately your responsibility as the business owner to understand the rules of an HSA and ensure that it is compliant.

Does your business qualify?

The CRA has specific guidelines that must be followed in order for your company to take part in an HSA and have it qualify as a tax-free Private Health Services Plan. *

The CRA states that incorporated/limited businesses of any size can qualify for an HSA. These can range from multinational corporations all the way to single owner-employee businesses. It is imperative to use HSA's for their created purpose, which is to provide small businesses a way to offer affordable and flexible employee health and dental benefits, not as a tax avoidance measure.

Things to consider:

The final decision will be with you and your tax advisor because you know your exact situation best. From a taxation perspective, it comes down to demonstrating that the benefit is bestowed upon you in your capacity as an employee of your business and not as a shareholder. Demonstrating this could include things like:

  • Being actively engaged in the day-to-day business operations as an employee
  • Have an employment contract in place for yourself which includes the details of an HSA being offered to employees (eligibility criteria, spending limits, coverage details,etc.)
  • Keeping corporate minute's which include:
  • An indication that the same type of plan would be offered to any new employees should y ou hire them.
  • An indication that the plan cannot be changed at the discretion of the employee to accommodate his/her needs
  • In order to give more substance to the HSA offered to the employee, it is suggested that the corporation provide an element of insured risk to the plan such as Major Medical and Travel Insurance together with the HSA.

Plan Design:

  • You can set up different classes
    • Executive, Manager, Full-Time, Part-Time, etc.
  • HSA maximums cannot be unlimited for any employee class
    • Class maximums must be reasonable
    • Ensure the benefit is comparable in nature and quantum to benefits generally offered to employees who perform similar services and have similar responsibilities for other employers of a similar size.
  • All Full-Time employees need to be included in the plan (T4 income earners only)
    • If a group plan is in place, a business can add an HSA for key members only
    • You cannot pick and choose who is included
    • Part-Time employee inclusion is optional
    • Contracted employees do not qualify
  • All covered employees must be aware of the details and have access to their plan information
  • The Plan must be 100% employer funded (employee does not contribute)
  • During plan setup the company decides whether to offer rollover of unused portions from the prior benefit year or to forfeit unused amounts
    • Rollover or forfeiting of unused funds applies to all benefit classes

In situations where the CRA considers the benefit is received by an employee-shareholder in his or her capacity as a shareholder, the full benefit would be taxed in the shareholder's hands and the corporation would not be entitled to a deduction for any amount paid on behalf of the shareholder.

We are aware that other HSA providers may administer their programs differently. As an organization, BeneFitsMyWay recommends a conservative approach to the interpretation of the ITA and CRA rules and guidelines surrounding PHSPs as we feel it is in the best interest of our clients.

In any event, BeneFitsMyWay and its parent company AGA Benefit Solutions do not provide tax advice or opinions on each individual's situation; we invite our clients to discuss their situation with their own tax advisors and determine their course of action based on their own specific facts and circumstances.

References:

CRA Views, Interpretation--external, 2010-0380551E5 -- Self-administered private health services plan

CRA Views, Conference, 2022-0928901C6 -- 2022 CALU--Q10--Private health services plan

false