HSAs: The best health plans you've never heard of?

Health spending accounts (HSAs) can be a flexible and cost effective way for a small business to offer tax-free health and dental coverage to employees. (iStock
Fiona Law examined a raft of traditional group insurance plans while looking to provide health and dental benefits for her staff at Calgary-based CompuTouch.
Her business, which uses technology to support interactive meetings and conferences, has just three full-time employees. She wanted something that was easy to set up and understand, a plan that would cover a wide range of medical expenses and offered the firm certainty of costs.
What she ended up choosing was not a traditional group insurance plan, but a health spending account (HSA).
"This was an alternative way of providing a benefit that was very straightforward and very transparent," she says. "It's a good compromise with a minimum of hassle."
HSAs have been around for many years and are now in place at thousands of small businesses in Canada.
But there are still many entrepreneurs out there who mistakenly think group health insurance is their only option to pay the medical bills that provincial medicare programs don’t cover.
What is an HSA?
A health spending account provides an attractive option for eligible small businesses to pay for all the medical expenses of employees and their families on a tax-free basis to the employee.
Eligible small business owners who provide HSAs can also deduct all their eligible medical and dental expenses from their gross business income, instead of making them a personal expense.
That makes HSAs an extremely cost-effective method of providing or supplementing health and dental benefits.
How do HSAs work?
Health spending accounts can be set up through third-party administrators/trustees or insurers that specialize in administering these plans.
Let's assume a small business owner has agreed to fund an HSA for his five arm's-length employees for up to $2,000 a year for each worker.
The employee (or a family member) visits a health practitioner and pays for an out-of-pocket medical expense (like prescription drugs, eyeglasses, or physiotherapy).
We'll assume they submit their receipts to a third-party administrator.
The administrator ensures the claim is legitimate and that the expense falls within the limit funded by the business. Once it's approved, the administrator sends a cheque to the claimant for the entire amount.
The claimant gets all their eligible medical expenses (plus any tax they may have paid) covered on a tax-free basis. And the business gets a 100 per cent tax deduction.
You can’t use a health spending account to cover your cosmetic surgery, though. Only medical expenses that qualify for the medical expense tax credit can be paid for through an HSA.
What does it cost?
Third-party administrators/trustees make their money by charging the business initial setup fees and sometimes annual fees, as well as transaction fees on claims that range from five to 15 per cent — 10 per cent is typical.
So a $1,000 claim would cost the company $1,000, plus the administration fee of perhaps $100, plus sales and premium taxes that vary from province to province. In Ontario, those taxes will add another $115 to the bill, making the total cost to the company $1,215 for a $1,000 claim.
That amount can in turn be entirely deducted by the business.
Depending on the nature of the business and the income bracket of the entrepreneur, the tax savings could be significant over having no plan in place./cbc.ca/