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Health Savings Account 101: Everything You Need to Know

A health savings account, or HSA is a great tool for entrepreneurs and small business owners to get the health coverage they need.
Article 6A Finances FYI HSAs
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Health and dental benefits provided by your employer or an insurer like Blue Cross or Manulife are important. They offset the cost of medication co-pays, dental work, paramedical services, and a variety of health tools (depending on the policy), from orthotics to blood glucose monitoring devices. But did you know there is an alterative to traditional health plans? It’s called a health savings account, or HSA. Sadly, this gem of a tool is vastly underutilized in Alberta. Read on to see if an HSA is right for you.

What is an HSA?

An HSA is a Canada Revenue Agency (CRA) tool that converts out-of-pocket, after-tax medical expenses into a pre-tax business expense. Business owners must already engage in what is called “self insurance,” meaning they must save up for their insurable expenses because they are not under the insurance protection of a major corporation. The HSA allows the money used for self insurance to go further and be more practical.

Who can use an HSA?

HSAs are designed for entrepreneurs and small business owners. If you operate a business, pay income tax, and have medical expenses, you are eligible.

What expenses are covered in an HSA?

Eligible expenses include:

  • All prescription drugs
  • All optical needs
  • Paramedical services like massage, physio, chiropractor
  • A variety of services like MRI
  • Health and dental premiums that were paid through a spousal plan - the HSA is allowed for business owners whose spouse is already on a traditional plan. Not only are their premiums an allowable expense, co-pays and excluded items from their plan are allowed under your HSA too.

How does the claim process work?

HSAs are a little complicated to administer. Most small business owners prefer to have an insurer administer them on their behalf. Some administrators only deal with HSAs, while others deal with a variety of insurance products, including HSAs. Whomever you choose, be very careful. The CRA has noticed an uptick in improperly claimed HSA expenses, and growing incidences of HSA tax fraud. Be sure you or your provider adhere to CRA’s Private Health Services Plan rules.

With a service provider, making an HSA claim is similar to making a group plan claim. The exception is, you first pay for the expense with your personal funds. Yes, this means out of pocket. Next, you submit the claim through the provider’s platform. You’ll need to note the patient’s name, the type and date of the service, the amount paid, etc. With the claim stated, your business then remits an online payment to your HSA. This opens a receipt trail, which is important to the process. Now, the HSA provider reimburses you personally for the out of pocket expense and that reimbursement is tax free. The payment you made via your business is used to reduce your tax burden – you’ll be submitting that receipt to CRA.

Let’s do a quick recap:

  • You pay the medical expense with your personal funds
  • You pay the administrator the same amount through your business account
  • The administrator reimburses your personal expense and issues a tax credit for the business
  • The business carries the expense for the fiscal year, making the claim on that year’s income tax documents

Is it really this complicated?

Yes. HSAs are complicated. They involve personal funds, business dollars, and the Income Tax Act. However, they are nothing to be feared. They are legal and when administered via a certified provider, you simply have to have enough cash on hand to front the expenses, submit your paperwork and payments, and let the provider handle the part that involves your tax savings on the transaction. Once you do the process a few times, you will better understand how it works and how it can save you money over the long-term.

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Check out your HSA options today

If you are a solo entrepreneur or run a small business and find the monthly costs of health and dental insurance prohibitive, check out an HSA. Although complicated, working with an HSA administrator can save you time, money, and help smooth out your cash flow for medical expenses.

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