Summary
As a small business owner, offering health benefits can feel overwhelming—traditional health benefit plans often come with high premiums, rigid structures, and minimum employee requirements. But there’s a powerful, flexible alternative that more Canadian entrepreneurs are turning to: Health Spending Accounts (HSAs). Designed specifically with cost control and flexibility in mind, HSAs allow businesses to provide meaningful, tax free health benefits to employees without the complexity of conventional group benefits programs.
What Is a Health Spending Account (HSA)?
A Health Spending Account is a tax‑free employee benefit that allows employers to allocate a fixed dollar amount for employees to spend on CRA‑approved health and dental expenses. Reimbursements are entirely tax‑free to employees and fully tax‑deductible to the business.
Rather than paying for a one‑size‑fits‑all benefits package, HSAs let employees choose how to use their funds based on their personal and family needs.
HSAs can be used for a wide range of expenses, including:
- Dental services
- Vision care
- Medical devices (crutches, hearing aids, heart monitors)
- Fertility treatments
- Prescription drugs
- Ambulance and emergency services
For a complete list of eligible expenses, visit the Canada Revenue Agency website.
Why Health Spending Accounts Are More Flexible Than Traditional Health Benefit Plans
Traditional benefits typically require minimum participation, fixed premiums, and pre‑set coverage levels. HSAs, on the other hand, offer unparalleled flexibility for small businesses:
✔ No Minimum Number of Employees
Whether you have one employee or twenty, you can implement an HSA—making it ideal for startups, SMEs, and growing teams.
✔ Multiple Employee Classes
HSAs allow employers to create different classes with varying spending limits. For example:
- Class A: Executives – $5,000 per year
- Class B: Full‑time staff – $2,000 per year
- Class C: Part‑time staff – $1,000 per year
This structure ensures fairness while aligning benefits with compensation levels.
✔ Complete Control Over Budget
You set the annual allowance per employee, meaning there are no surprise premiums or rising plan costs. You only pay when claims are made, and the cost to the business is the claim amount plus administration fees and taxes.
How Health Spending Accounts Work: Simple, Tax‑Efficient, Employee‑Friendly
Here’s how a typical HSA transaction works:
- An employee incurs an eligible medical or dental expense.
- They submit the claim to the HSA provider. Majority of providers offer online claim submittal!
- The employer receives a bill for:
- The claim amount
- Administration fee (typically around 10%)
- Applicable GST/HST, PST, and premium taxes
- The employee is reimbursed 100% of their claim—tax‑free.
For example, a $100 claim may cost a business $121.50after fees and taxes.
HSA Advantages for Small Businesses
1. Cost Predictability
Set your annual budget with precision. If you allocate $2,000 per employee, that is the maximum exposure (plus fees/taxes). No premium increases, no unexpected renewals.
2. Tax Benefits
- Employees receive reimbursements tax‑free.
- Businesses write off the entire cost as a tax‑deductible expense.
3. Employee Empowerment
Instead of choosing coverage employees may not need, HSAs give individuals the freedom to decide exactly how to spend their allotment.
4. Easy Administration
Modern HSA providers offer streamlined portals, fast reimbursement, and seamless claims processing.
5. Works Alone or Alongside Existing Plans
Use an HSA as:
- A standalone plan for small businesses new to offering benefits
- A top‑up or gap‑filler for businesses with traditional plans (e.g., orthodontics, deductibles, co-insurance gaps)
6. Ability to Add Optional Insurance Benefits
In addition to flexible health and dental spending, HSAs can be paired with other valuable insurance benefits to create a more comprehensive package, such as:
- Life insurance
- Short‑term disability coverage
- Travel insurance
These add‑ons allow small businesses to offer a more complete and competitive employee benefits program without the cost and rigidity of traditional plans.
Setting Employee Limits: What to Consider
When budgeting your HSA, consider both the claim amount and the additional costs from administration fees and applicable taxes. If your business budgets $10,000 for employee HSAs, expect actual costs to reach approximately $12,150 due to administration fees and provincial taxes on premiums. For example, in Ontario, the combination of HST and premium tax can add up to 21.5% to your total cost. For the business owner, it is recommended to allocate no more than 10% of a business owner’s income to HSAs, as exceeding this threshold may draw scrutiny from CRA auditors, who look for reasonable limits on health spending in relation to personal income.
Different provinces apply different tax rates to administration fees and premiums, so your total cost may vary based on employee location. For instance, administration fees in Alberta are subject to 5% GST, while in Quebec, both GST and QST apply, resulting in higher overall costs for businesses operating there.
Why Health Spending Accounts Are Perfect for Growing Small Businesses
As your team expands, HSAs scale easily without requiring expensive group insurance commitments. You can add classes, adjust budgets, and tailor benefits as your workforce evolves.
This makes HSAs a smart, sustainable employee‑benefits strategy for:
- Professional service firms
- Trades and construction companies
- Family‑run businesses
- Startups and incorporated entrepreneurs
Final Thoughts
A Health Spending Account is a flexible and cost-effective way for small businesses to offer health benefits, with no minimum employee requirements, customizable options, tax advantages, and predictable costs. If you're considering an HSA or need guidance on structure and limits, we can assist you in finding the right provider and/or manage it for you.
Let's help create a benefits plan tailored to your business.
