As a business owner in Canada, managing your healthcare expenses can be a daunting task. In addition to offering employee benefits in your company there are other ways you can make sure you are taking care of yourself in a tax-effective way: a Health Spending Account (HSA) and the Medical Expense Tax Credit (METC). I get asked this question all the time, “why would I pay for an HSA when I can just submit these claims at year end?”
Flexibility and Simplicity
One of the main advantages of an HSA is its flexibility. With an HSA, you can allocate a specific amount of pre-tax dollars to cover your healthcare expenses. If you are marrying the HSA with your benefits you can use them together to:
– pay the top up portion if your benefits do not reimburse at 100%
– cover services inside your plan (such as massage) beyond your plan maximums
– cover expenses for you which are not included in your plan (a common example here is orthodontics)
An HSA also simplifies the record keeping, as it eliminates the need for extensive paperwork associated with the METC when you go track and submit all your expenses. Instead of tracking individual receipts and calculating eligible expenses, you can use your HSA funds as needed for a wide range of healthcare costs.
With an HSA you also get professional claims adjudication instantly, which means you know whatever you are submitting has been vetted for eligibility. If they are claims from members on your team you are getting an arms length protection against fraud.
Immediate Tax Savings
Using an HSA provides immediate tax savings, while the METC offers only a tax credit. When you claim medical expenses through the METC, you can only receive a percentage of those expenses as a tax credit, typically ranging from 15% to 20%. On the other hand, with an HSA, all the funds allocated are tax-free, resulting in significant tax savings from the first dollar spent. This immediate tax benefit can be particularly advantageous for businesses looking to reduce their tax burden and improve cash flow.
The METC also has a limit which is defined by CRA as the lesser of the following two amounts:
- a fixed amount ($2635 in 2023); and
- 3% of the individual’s net income for the year.
If you have $5000 in medical expenses that you submit through your HSA, your company will fund the $5000 + admin fees and tax for the HSA and you will be personally reimbursed $5000 tax-free.
Enhanced Cost Control:
By opting for an HSA, business owners gain enhanced cost control over their healthcare expenses. With an HSA, you can set a budget and allocate funds accordingly, ensuring that you have the necessary resources to cover healthcare costs throughout the year. This proactive approach empowers business owners to plan and manage their healthcare spending effectively, avoiding unexpected financial burdens.
Health Spending Accounts can be used in concert with employee benefit plans to carve out certain expenses such as paramedical coverage (physio, chiro, naturopath, etc) or to offer benefits not every staff member might be interested in, such as vision care.
Broader Range of Eligible Expenses:
Another compelling reason to choose an HSA over the METC is the broader range of eligible expenses. The METC has strict guidelines regarding which medical expenses qualify for tax credits, often excluding many common health-related costs. In contrast, an HSA allows for a wider array of eligible expenses, including prescription medications, dental treatments, vision care, paramedical services, and more. This flexibility enables business owners to cover various healthcare needs that may not be covered under the METC.
Benefits for Employees:
An HSA also presents an opportunity for business owners to provide a valuable benefit to their employees. By offering an HSA as part of their employee benefits package, businesses can enhance their recruitment and retention efforts. Employees can utilize HSA funds for eligible healthcare expenses, improving their overall well-being while reducing their financial burdens. This demonstrates a commitment to employee welfare and can contribute to a positive work environment.
As a top-up benefit, HSA dollars are a nice way to give employees some additional flexibility and choice as far as how their benefits dollars get used.
Conclusion:
While both the Health Spending Account (HSA) and the Medical Expense Tax Credit (METC) offer tax benefits for Canadian business owners, the HSA stands out as the smarter choice. Its simplicity, flexibility, immediate tax savings, cost control, broader range of eligible expenses, and potential employee benefits make it a more advantageous option. By opting for an HSA, Canadian business owners can better manage their healthcare expenses, reduce their tax burden, and promote the well-being of their employees.
Working alongside a great benefits plan, an HSA is also a tool that allows for both cost saving strategies and creative rewards and recognition.
This is an opinion piece and nothing here should be considered tax advice. Confirm with your accountant prior to making any decisions.