We are often asked whether Health Spending Accounts can be used to pay for gym memberships or fitness equipment. In this post, we review the differences between Health Spending and Wellness Spending Accounts – and outline ways in which you can provide the best of both worlds.
Health Spending Accounts (HSAs) are governed by Canada Revenue Agency (CRA). These accounts enjoy tax-preferred treatment because they are treated like health and dental benefits. That is, they offer the business an expense that can be deducted from revenue and any claims reimbursed to employees are tax-free.
This preferential tax status comes with certain parameters:
1) The limit must be reasonable: Industry leaders have determined that the annual limit should be within 10-15% of the normalized income of a fairly compensated employee in the same role. In the case with a single-owner employee, CRA would likely claim that the HSA is given as a shareholder benefits unless the limit is reasonable. We always recommend speaking with your tax advisors to determine what would be considered reasonable.
2) Eligible Expenses: CRA defines what types of expenses can be claimed through Health Spending Accounts. Essentially, it’s the same list of expenses that are allowed under the Medical Expense Tax Credit on your personal income tax return. The most common types of claims we see are prescription drugs (no over-the-counter medications allowed), dental claims (as long as they are not purely cosmetic), vision care, fees paid to professionals such as massage therapists or other registered mental health professionals, and medical items that are prescribed by a licensed physician.
Wellness Spending Accounts (WSA)
These come by many different names including Lifestyle Spending Accounts, Taxable Spending Accounts, or Wellness Accounts.
Essentially, they are plans to cover items that fall outside of a traditional health plan, but may still contribute to an employee’s well-being and articulate the values of your business.
Typical items include gym memberships, vitamins and supplements, sporting goods, and much more. The list of eligible expenses is defined by the employer, so virtually anything is eligible.
We don’t recommend that business owners set up a taxable wellness account to pay for golf or gym memberships simply because there is no preferential tax treatment, and the owner would be paying us to adjudicate whether they can take money out of their business just like T4 or dividend income.
Depending on the needs of your business and your employees, these types of spending accounts can be offered individually or together.
myHSA and myWSA: The business could provide both types of accounts to control utilization. An example would be a $1000 HSA and $250 WSA.
myFlex: In this plan design, the employer provides the limit allowed to the employee and how the allocations occur (annually, semiannually, quarterly, or monthly). The difference between this and a dedicated structure is that the employee gets to choose at the beginning of the year how they want to allocate the dollars based on personal needs or wants.
An example of a Flex Account could be $2,500 flat amount offered by the employer. Each employee decides how they want to split that money. The employee choices are locked in for the year and must equal the total combined $2,500. Our system monitors and limits usage based on the selected plan design.
myASO: This structure allows the business to get creative. While technically still a health spending account, we can mimic the health, dental, and vision aspects of a traditional insured health and dental plan. Dollar amount caps, lifetime maximums, different co-pay structures can all be accommodated.
The ASO plans allow you to carve out plan elements that are known expenses such as vision, dental, or paramedical claims. You benefit by lower transaction costs than what an insurance company would be able to offer.
The WSA can be included as part of a WSA structure like the HSA with dollar amount caps, lifetime maximums, and different copays.
An example of a dedicated myASO structure would be a $2,500 Health Spending Account with a $500 annual maximum for paramedical practitioners like massage therapy, $250 vision coverage with a 24-month maximum, and drugs covered at 80%.
The ability to offer choice and flexibility to employees can be a fantastic attraction and retention tool for your business. Combined with the power to control and limit costs, the myHSA system can benefit any employer.
Contact us to discuss your plan design and whether you would like to make any changes.