Health Spending Accounts (HSAs) are a tax-efficient employee benefit when properly structured. At Coastal HSA, we follow all CRA Private Health Services Plan (PHSP) rules to ensure compliance and protect both employers and employees.
We’ll discuss CRA rules for HSAs and explain what you need to know. Here’s a breakdown of the key principles for a compliant plan, based on CRA’s definition of a PHSP:
“The plan is in the nature of insurance and contains all of the following elements:
- An undertaking by one person
- To indemnify another person
- For an agreed consideration
- From a loss or liability in respect of an event
- The happening of which is uncertain”
1. No Backdating
Backdating is not allowed. The CRA requires the event to be uncertain, meaning the plan must exist before expenses are incurred. Covering past expenses violates this principle.
2. T4 Income Required
HSAs are strictly an employee benefit. A T4 confirms a valid employer-employee relationship. Independent contractors or non‑T4 workers generally cannot participate. Shareholder employees can participate but they must have T4 income.
3. Eligible Business Structures
HSAs can be set up by:
- Operating corporations
- Non-profits with employees
- Sole proprietors with at least one arm’s length employee
4. Non-Discriminatory Allocations
All employees within the same class must receive the same HSA amount. Employee classes must be based on objective, job-related criteria to avoid discrimination.
5. HSA Amounts Cannot Change Mid-Year
Allocations must be set at the start of the plan year. Changing them mid-year can violate the “agreed consideration” principle and create compliance issues.
6. Reasonable Allocation Basis
CRA expects HSA allocations to be reasonable. At Coastal HSA, allocations are limited to no more than 25% of T4 income.
7. Eligible Medical Expenses Only
Only CRA-approved medical expenses are reimbursable. Some expenses require supporting documentation. https://www.coastalhsa.ca/health-spending-accounts-eligible-health-expenses/
8. Documentation & Compliance
Retain all receipts and supporting documents. At Coastal HSA, you digitally submit the necessary documentation, and we securely store it on your behalf.
Conclusion
A properly structured HSA is a valuable, tax-efficient employee benefit. By following CRA rules, including backdating restrictions, T4 requirements, non-discriminatory allocations, and eligible expenses, employers can maximize benefits while staying compliant.
Contact us today to set up a plan that works for your business and your employees.
Sources:
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/medical-expenses.html#med-phsp
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/lines-33099-33199-eligible-medical-expenses-you-claim-on-your-tax-return.html
