Health spending accounts

Health spending accounts

Health Spending Accounts or HSAs are a tax-free health benefit vehicle available to employers for employees residing in Canada. They were introduced in 1986 by Canada Revenue Agency (CRA) in their interpretation bulletin entitled IT-85R2.


What is an HSA?

A Health Spending Account uniquely designed bank account established exclusively for the purpose of health care spending. The company makes a contribution on behalf of an employee(s) into a Health Spending Account to be used on medical expenses incurred. It is a non-taxable benefit for the employee and a 100% business deduction for the company. Contributions are determined at the start of the program for each employee enrolled. The contribution amount, once set at the start, can not be changed within the first 12 months. Changes can only be made at the anniversary date or if a life event has occurred (A Life Event is defined as a marriage, birth or death in the family)

Health and Welfare Trust (HWT)

A Health & Welfare Trust (HWT) is a trust arrangement through which an employer can provide certain benefit programs to employees, including a private health services plan (“PHSP”) as defined under the Canadian Revenue Agency (CRA) guidelines. One or more employees may be covered under a HWT. A HWT is a specific trust that satisfies certain requirements as set out in CRA guidelines (specifically paragraph 6 of the Interpretation Bulletin IT-85R2 - Health and Welfare Trusts for Employees)) [IT-85R2 - Health & Welfare Trusts for Employees, Revenue Canada, July 31, 1986.] .

These requirements are as follows:

(a) The funds of the HWT cannot revert back to the employer or be used for any purpose other than providing the health and welfare benefits for which the contributions are made;

(b) The employer’s contributions to the fund must not exceed the amounts required to provide the benefits;

(c) The payment made by the employer cannot be made on a voluntary or gratuitous basis. In other words, once the payment plan is established it cannot change during the policy year. The contributions must be enforceable by trustees should the employer decide not to make the payments required;

(d) The trust is a legal arrangement between the employer, Benecaid acting as the administrator and an independent trustee. The expenses to be paid out of the trust must qualify as medical expenses as defined by CRA (specifically subsection 118.2(2) of the Act).

Private Health Services Plan (PHSP)

With the release of IT-339R2 [IT-339R2 - Meaning of Private Health Services Plan, Revenue Canada, August 8, 1989] , Revenue Canada later allowed for an additional form of HSA for non-incorporated entities. The Private Health Services Plan, or PHSP, follows many of the same rules as the Health & Welfare Trust with some key differences...

Annual Maximums - Since the PHSP is designed for self-employed individuals or unincorporated businesses, the PHSP limits annual maximums based on family size as follows...

$1,500 / sole proprietor$1,500 / dependent over 18 years old$ 750 / dependent under 18 years old

Example: A household with 1 sole-proprietor, a spouse over 18, and one child would be eligible for 2 X $1,500 PLUS $750, for a total of $3,750.

Forfeiture of Funds - Unlike the HWT, the PHSP also has limits in place for the length of time the funds can be used. For every dollar deposited into a PHSP account, the funds must be used within 24 months from the date of deposit, otherwise they will be forfeited to the administrator.

Eligible Expenses

The most common definition of a medical expense is a payment made to a licensed medical practitioner qualified to practice under the provincial laws of the place where the expenses were incurred. Medical expenses eligible to be paid out of the HSA are expenses which would otherwise qualify as medical expenses within section 118.2(2) of the Income Tax Act. Some of the basic healthcare expenditures covered by an HSA include...

Prescription Medicines, Drugs, & Vitamins: Generally, payments for prescription medicines and drugs( i.e. over the counter drugs) qualify as medical expenses if purchased by the employee, their spouse, or their dependant, as prescribed by a medical practitioner and as recorded by a licensed pharmacist.

In the case of insulin, oxygen and liver extract injectible or vitamin B12 for pernicious anemia, no prescription is required.

If vitamins are prescribed by a medical practitioner, but not purchased from a pharmacist who has recorded the prescription in a prescription record, then the expense is not an eligible medical expense. However, in recent court cases, they can allow the eligibility of prescribed vitamins, herbs, bottled water, organic and natural foods and not dispensed by a pharmacist if the items are required to sustain the life of the user. It is not eligible if it is simply to satisfy a lifestyle the user has chosen.


Eyeglasses, if prescribed, are eligible medical expenses.


An amount paid to a dentist, dental hygienist, dental surgeon or dental mechanic for dental services provided to the patient (to the extent that the fees are for diagnostic, therapeutic or rehabilatative services) are eligible medical expenses.

Professional Services:

An amount paid to a licensed medical practitioner is an eligible medical expense. They can include depending on the provincial jurisdiction: • Chiropractor• Audiologist• Chiropodist• Christian Science Practitioner• Dentist• Dental Hygienist• Dental Technician• Denturist• Dietician• Osteopath• Physiotherapist• Podiatrist• Psychiatrist• Psychoanalyst• Physician and Surgeon• Psychologist• Radiologist• Massage Therapist• Midwife• Neurologist• Occupational Therapist• Optician• Speech Therapist• Registered Nurse • Respiratory Therapist• Naturopath

All medical doctors, medical practitioners, dentists, pharmacists, nurses or optometrists must be authorized to practice under the laws of the provincial jurisdiction where the service is rendered, in order for the medical expenses to be eligible.

Popularity and Growth

For years, HSAs have been a part of Canadian group health plans - primarily as a part of Flex Benefit or Cafeteria Plans. These HSAs have been part of what is commonly referred to as a notional credit model. The "notional credit" model, outlined in the Canada Revenue Agency IT-bulletin entitled IT-529 [IT-529 - Flexible Employee Benefit Programs, Revenue Canada, February 20, 1998] was designed to allow companies to add an HSA to a Flex Benefits Plan as an additional benefit for items not covered under the traditional group benefits plan.

Providers of HWTs & PHSPs

Today, numerous insurers provide various versions of the HSA to Canadian employers. Few insurers exist with expertise in the areas of both HWTs and PHSPs, with Benecaid being the most widely acknowledged supplier in the industry. Quikcard Solutions headquartered in Edmonton Alberta with offices in Toronto and Halifax have been administering PHSP's for more than twenty years and are generally acknowledged as the most sophisticated experienced provider of full service plans in Canada. Quikcard has the largest network of signed health care vendors in Canada and facilitates access to these dentists pharmacies optometrists and others by way of a unique payment card accepted at virtually all pharmacies in Canada and in most dental offices. Most major insurers such as Manulife, Sun Life, and Great-West Life offer HSAs in the form of a PHSP or notional credit program exclusively.


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