Most US employers are familiar with a product called Health Savings Accounts (HSAs), where employees receive matching pre-tax contributions to an account earmarked for health spending. HSA in Canada, however, stands for Healthcare Spending Account (HCSA or HSA) and it’s substantially different.
This blog outlines the differences between US and Canadian HSAs, explores why they’re growing in popularity, and how Employers of Record can help.
Why HSAs Are a Growing Trend in Canadian Benefits
Healthcare Spending Accounts (HCSAs), also known as Health Spending Accounts (HSAs) are on the rise in Canada. In fact, 40% of Canadian employers now offer HSAs as part of their benefits plans, a 10% increase since 2017, according to the 2024 Benefits Canada Healthcare Survey. There are several reasons for this growing trend and US employers will be familiar with them!
Controlling Benefit Costs
Just like in the US, the cost of healthcare benefits is rising in Canada. Some employers opt for an HSA instead of a traditional benefits plan to keep costs down for them and their employees alike.
HSAs are funded by employers at an amount of their choosing and they aren’t topped up throughout the year. With an HSA, healthcare spending is strictly controlled and won’t go up in following years unless the employer chooses.
Well Rounded Benefit Packages
Companies that hire in particularly competitive talent markets, such as tech, are increasingly opting to add an HSA component to their benefits plan. HSAs can plug any gaps in their existing plan and allow employees to spend on lifestyle, not just healthcare.
Canadian benefit plans typically don’t cover wellness expenses such as fitness equipment, gym memberships, or optional procedures – whereas HSAs can.
Flexibility for Employees
The last reason that many employers are switching to or adding HSAs is to provide more flexibility to employees. With an increasingly age-diverse workforce of employees in their early twenties to their early seventies, benefits flexibility is more important than ever before. Employees who work beyond the traditional retirement can receive an HSA, no matter their preexisting conditions.
HSAs allow employees to make the most of their benefits, whatever that means for them.
Understanding HSAs in Canada
Health Spending Accounts (HSAs) in Canada are quite different to Health Saving Accounts (HSAs) in the United States.
Let’s explore the three major differences between Canadian and US HSAs:
Savings Account vs Spending Account
The biggest difference is that Canadian HSAs aren’t a savings account – they’re a spending account that employees’ access via a physical or virtual card. HSAs are an employer-funded extension of or replacement for traditional benefit plans.
HSAs that are part of a larger benefit plan are often linked so that copays, prescriptions and other medical expenses not covered by core benefits, are automatically applied to the HSA.
Because HSAs are employer-funded, they are usually a “use or lose it” benefit that resets each year. Employees who don’t spend all their HSA funds cannot roll them forward into the following year.
Tax Implications of Canadian HSAs
Another critical difference is the tax implications of HSAs. In and of themselves, HSAs in Canada are not considered a taxable benefit to the employee. That means employers and employers can use this account to cover medical and wellness expenses tax free.
However, HSAs can also cover healthcare expenses that the Canada Revenue Agency (CRA) defines as taxable, such as gym memberships, weight loss coaches, fitness devices and equipment. These expenses can be handled through many HSAs but must be added to the employee’s pay slip and end of year T4 tax form as additional income.
Examples of Non-Taxable Eligible Expenses
The Income Tax Act of Canada defines what is considered an eligible expense non-taxable for an HSA. Some of these include:
- Medically necessary drugs
- Medically necessary equipment including syringes, pacemakers, hearing aids etc.
- Prescribed eyeglasses or contact lenses
- Vision care including surgery
- Dental care including orthodontic and restorative services
- Diagnostic procedures
- Medical practitioners
In this respect, Canadian HSAs are more similar to American Flexible Spending Accounts (FSAs) than Health Savings Accounts.
All Employees Are Eligible to Receive an HSA
The last major difference is who is eligible to be offered an HSA. In Canada, all employees and some contractors are eligible to participate in an HSA. They can be set up by corporations of all sizes, including self-employed incorporated contractors, and sole proprietors with at least one arms-length employee.
This means that you can offer an HSA to any employee you’d like to, and you can suggest it to contractors as a way to manage their healthcare expenses.
How EORs Help You Offer the Best Employee Benefits
Employers of Record like Canadian Payroll Services hire employees on behalf of international companies. We hire, onboard, and pay your team – you simply manage their day-to-day operations. A key component of EOR services is providing benefits.
Many of our clients have small teams in Canada and no local subsidiary – that makes local benefits a challenge. Because EORs hire on behalf of clients, we can use our larger headcount to offer great benefits at a competitive price.
Canadian Payroll Services offers both traditional health insurance and health spending options, along with a built-in employee assistance plan. CPS clients can choose to offer their Canadian candidates traditional health benefits, an HSA, or both.
Navigating Canadian benefits can be complex for US employers. As your benefits expert in Canada, we’ll help you craft a benefits package tailored to your unique business needs.
