Everything You Need to Know About a Health Care Spending Account (HCSA)
By: Benefits by Design | Thursday November 1, 2018Updated : Friday December 30, 2022
Health Care Spending Accounts (HCSA), also known as Health Spending Accounts, may just be the future of employee benefits.
What is a Health Care Spending Account?
A Health Care Spending Account (HCSA) is an employee benefit that offers reimbursement for a wide range of health and dental expenses. These expenses are often in addition to what is provided for under a traditional, fully insured plan with Extended Health Care (EHC) coverage.
In our experience, the best way to think of an HCSA is like a bank account. Each employee has their own HCSA which they access and use for eligible health and dental expenses (more on those below). Employees receive a set amount for the year, chosen by the employer, which allows employers to accurately predict their overall cost of providing benefits. This is different from traditional group benefits plans, which can have varying costs or large annual increases.
The Canada Revenue Agency (CRA) determines the eligible expenses for an HCSA. HCSAs are administered in accordance with the Income Tax Act (Canada). As with other employee benefit programs, an HCSA is a tax-deductible benefit, and the benefits are received tax-free.
HCSA in Action
To showcase the power of cost containment, let’s consider an example of a small tech startup with three employees. Each employee is given a $1,000 HCSA to use on eligible expenses per year. Right off the bat, we can easily calculate their overall benefits spend as $3,000/year ($1,000 x 3). Although it’s important to note that there are usually additional administration fees and taxes on top of this, these too are predictable, and so our tech startup, with funds tight as they start their business, can accurately predict how much benefits will cost them per year.
Spending Account Claims Submissions Deadlines and Carry-Forward Rules and Options
Eligible HCSA Expenses and the Canada Revenue Agency (CRA)
HCSA’s are used exclusively for eligible health and dental benefits expenses. There is a long list of what is eligible under a HCSA, but here are a few of the most common uses:
- Ambulance Services
- Cancer Treatment
- Dental Services
- Vision Care
- Medical Cannabis
- Fertility Treatments
- Hearing Aids
- Heart Monitoring Devices
In addition to those common uses above, HCSAs can also be used for the purchase of gluten-free products for those with celiac disease, in vitro fertility programs, medical services outside of Canada, and more!
How Does a Health Care Spending Account Fit Into my Benefits Plan?
HCSA’s can cover costs not usually covered by a fully-insured plan, or as an alternative to traditional benefits entirely!
#1. As a top-up to traditional benefits (co-payments) or when you have reached a maximum in coverage.
Imagine your Dental Insurance plan was 75% employer-paid and 25% employee-paid. If an employee required a root canal (at the cost of $1,000) their dental plan would cover 75% of that employee’s root canal ($750). But the employee would still be 25% (or $250) out of pocket.
That’s where an HCSA could come in! An employee could use their HCSA to pay the remaining 25% of the root canal, as that is an eligible dental expense.
#2. To supplement existing coverage.
HCSA’s can augment your existing benefits coverage. For example, if your traditional plan doesn’t cover the cost of major dental expenses (such as braces), you can use your HCSA dollars instead!
#3. As an alternative to traditional benefits entirely.
Employers can truly invest in the HCSA model by exclusively providing benefits coverage through an HCSA. BBD’s Standalone® product follows this model.
6 Differences between a Traditional Insurance Plan and a Health Care Spending Account
Why should employers include a Health Care Spending Account in their employee benefits plan?
Today’s workforce is extremely diverse, and it’s becoming challenging to provide a benefits solution that works for everyone. HCSAs provide your employees with a choice in how and when they spend their dollars, allowing employers to provide coverage for what’s most valuable to each person. We like to use our own benefit plan as an example:
We used to offer a $200 vision care benefit to our 90+ employees across Canada, but since only approximately 50% of employees wear glasses or contacts, half of our staff were paying premiums for a benefit they would never use. That didn’t sit right with us.
So we removed our vision care benefit entirely and instead offered a $200 HCSA to all employees in its place. This gave employees the choice of what to use their $200 on; those who needed a new pair of glasses could buy them, but other employees could choose to cover extra dental costs or paramedical expenses as needed.
What are the tax advantages of a Health Care Spending Account?
Offering a HCSA as part of your benefits package comes with certain tax advantages, since HCSAs are a non-taxable benefit. This means that HCSA contributions from an employer to an employee are tax-free. If an employer allots $500 in an HCSA, that’s what employees have to spend, rather than $500 less government taxes.
Meanwhile, those same contributions are 100% tax-deductible for the employer. At tax time, employers can include their total HCSA spend (as claimed by employees) as a corporate tax deduction. Using our previous tech startup as an example, they would be able to claim up to $3,000 ($1,000 x 3 employees) plus the cost of administration fees and taxes.
What’s the difference between a Health Spending Account and a Personal Spending Account?
The main difference between a Personal Spending Account (PSA) – also known as a Wellness Spending Account (WSA) – and an HCSA is what’s covered. Plan Sponsors can decide the expenses covered under a PSA. Additionally, PSA’s are a taxable benefit for employees and become part of their total compensation package.
Download the Health Care and Personal Spending Account Comparison (PDF).Back to Top