The health spending account (HSA) is an alternative to traditional group benefits and primarily designed for small business owners. It is a cost-effective method of providing health care benefits to employees. Businesses with as few as one employee are eligible for this account.
In this article, we have listed seven rules set by the Canada Revenue Agency (CRA) that you should keep in mind when establishing a health spending account.
1. Contractual Obligation
An employer-employee contractual obligation should be present to set up an HSA. The contract between the employer and employee should be written as per the rules set by the CRA. Verbal contracts are not satisfactory to open the account.
2. For Employees Only
Remember that the HSA can be opened for employees only. Self-employed individuals cannot open an account for themselves. They are required to buy an insured plan through an insurance company.
Also, for unincorporated businesses, only arm's length employees are eligible for the plan. Business owners can be eligible for the plan but only if they act as an employee and receive a salary.
3. Specific Health Care Needs
The HSA allows employers to reimburse employees for specific health care expenses. For eligible medical expenses, you should read the CRA publication that lists medical expenses that are eligible for credits. You cannot claim medical expenses other than those mentioned on the list.
4. Expenses Recommended by a Licensed Medical Practitioner
Keep in mind that medical expenses should be recommended by a licensed medical practitioner for the HSA. In some cases, proof will be required. In case of any medication, it should be dispensed by a licensed pharmacist or medical professional. You can view the CRA publication for authorized medical practitioners and pharmacists. The CRA has listed practitioners by territory and province.
5. Contract Between Employer and HSA Administrator
Lastly, there should be a contract between the employer and the health spending account administrator. The CRA recommends that the administrator should be a “disinterested” third party. This is important to avoid any conflict of interest when it comes to reimbursement of medical expenses.
Also, an annual spending amount should be mentioned in the contract between the employee and employer. Any alteration in this amount is controlled by the HSA administrator.
If you are a business owner, you should note the rules regarding the health care plan.