When dealing with Canada Revenue Agency, it's always a good idea to exercise caution. In this article, we bust some commonly held myths about how an HSA must be structured.
Companies with only one shareholder-employee cannot have a health spending account.
FALSE
When set up correctly, a sole business owner as the sole employee can have a health spending account. Key factors include establishing a fair limit compared to industry peers and ensuring an 'element of risk.' We can help guide you with respect to establishing fair limits for your HSA.
The shareholder MUST be earning a T4 income to set up a health spending account.
FALSE…but it’s a good idea
When a shareholder participates in an HSA, it’s assumed to be a shareholder benefit until the facts prove otherwise. When only taking dividends – that isn’t going to be a fact you can use in your defense. On the other hand, T4 would indicate there is an employer-employee relationship.
CRA published an article entitled Buyer Beware When it Comes to Health Spending Accounts. When it first came out, it mentioned that shareholders must be earning a T4 income, and this was the first time T4 income had appeared. Not long after publication, reference to T4 income was removed.
In conjunction with fair limits applied to the total amount that could be approved in the context of an HSA, T4 income is a good idea but not imperative.
The business owner has unlimited discretion at choosing their HSA limit and can make plan changes as they wish.
FALSE
Please reach out to us to help determine reasonable health spending account limits. The general advice is to set a limit that's no more than 10-15% of what someone in their role would normally make in a year ie. normalized income. This helps ensure the limit is fair in the eyes of CRA.
Plan limits should not be increased mid-year to accommodate expenses. To maintain the integrity of the plan, the limit should be set at the start of the year and not adjusted until the following renewal.
For the purposes of the new Canada Dental Benefit - A health spending account counts as Dental Coverage and must be reported on employee’s T4s.
TRUE
CRA considers a Health Spending Account as Private Dental Insurance. When the plan sponsor is completing T4s, they must indicate the employees had dental coverage, regardless of usage or HSA plan amount.
The exception to this rule is when an employer has set up the HSA to only accommodate health expenses. No dental expenses would then be available to employees or their dependents.
Unused HSA credits can be rolled into an employee’s RRSP.
FALSE
Unused HSA credits CANNOT be rolled into an RRSP at the end of the year. HSA dollars can only be used for qualified medical expenses and by redirecting the funds outside of a PHSP, the plan is no longer onside. Here's where the CRA clarifies:
A flexible health and wellness spending account can help avoid these situations. An employee could be offered the opportunity to allocate some or all of their account to an RRSP or TFSA at the beginning of a plan year.
Only items mentioned in the METC list can be covered by an HSA
True… but there's a little wiggle room
The CRA says that 90% or more ("all or substantially all") of the expenses claimed through the HSA must appear on the Medical Expense Tax Credit. Therefore, 10% of claims can fall outside of this list. It's important to note, the 10% is not based on the plan member's annual limit, but instead 10% of their eligible expenses processed in that year.
If you have questions about your HSA set up or would like to revisit your plan, please book a meeting. We’d love to hear from you.