Health spending accounts are set up to reimburse employees for medical expenses. The employer contributes into the HSA on behalf of the employee, a tax deductible expense for the employer. When the employee claims the money back for reimbursement of medical expenses they receive the money tax free.
Eligible medical expenses for reimbursement include all the expenses that CRA deems eligible for the medical deduction including premiums on individual health plans and Critical Illness insurance, subject to the amount of funding in the plan. See the CRA Link
This is a way of getting tax free income into the employee’s hands without having to make CPP or EI contributions for either the employee or employer.
These plans can be set up for corporations, partnerships and sole proprietors. There are different rules for each structure, but all structures create tax savings for both employee and employer.
HSA’s help control costs as the amount put into the plan for each employee is fixed yearly by the employer i.e. no unforeseen cost increases due to high usage. The employee can use as much or as little of the plan as they wish and carry forward unused contributions indefinitely, maybe saving for large expenses such as braces or medical procedures not covered by traditional plans.
HSAs can be used as a standalone health plan or as a supplement to an insured plan, the key is what structure works best for you.