HSA vs. LSA vs. Traditional Group Insurance: Which is Right for Your Team?

"Should we offer an HSA, an LSA, traditional group insurance—or some combination?"

It's one of the most common questions HR managers and business owners ask when building a benefits package. The answer depends on your workforce, budget, and priorities.

Let's break down each option so you can make an informed choice.

Quick Definitions

Health Spending Account (HSA): A tax-free employer-funded account employees use for CRA-eligible medical expenses (dental, vision, prescriptions, therapy, etc.). Also called a Private Health Services Plan (PHSP).

Lifestyle Spending Account (LSA): A taxable employer-funded account for non-medical wellness expenses (gym memberships, fitness equipment, professional development, pet care, etc.). Also called a Wellness Spending Account (WSA) or Personal Spending Account (PSA).

Traditional Group Insurance: Employer-sponsored insurance policies covering defined health, dental, vision, life, and disability benefits. Premiums are paid to an insurance carrier who manages claims.

Side-by-Side Comparison

FeatureHSALSATraditional Group InsuranceTax treatmentTax-freeTaxable benefitUsually tax-freeExpense typesCRA-eligible medicalAnything employer definesPre-defined coverageEmployee flexibilityHigh (within medical)HighestLowCost predictabilityFixed allocationFixed allocationVariable premiumsYear-over-year costsYou controlYou controlCan increase 10-20%/yearUnused fundsEmployer keepsEmployer keepsPremiums still paidBest forHealth flexibilityLifestyle/wellnessCatastrophic coverage

Deep Dive: Health Spending Account (HSA)

How it works

You allocate a fixed amount per employee (e.g., $2,000/year). Employees submit receipts for CRA-eligible medical expenses and receive tax-free reimbursement.

What it covers

• Dental care
• Vision (glasses, contacts, laser surgery)
• Prescription medications
• Physiotherapy, massage, chiropractic
• Mental health (psychologists, counsellors)
• Medical equipment
• Fertility treatments
• And hundreds of other CRA-eligible expenses

Advantages

• Tax efficiency: Employer deduction + employee tax-free receipt
• Flexibility: Employees choose what matters to them
• Cost control: You set the budget; no surprise premium increases
• Simple: Submit receipt → get reimbursed
• Unused = savings: If employees don't claim, you keep the funds

Limitations

• Only covers CRA-eligible medical expenses
• No coverage for lifestyle/wellness items
• Not designed for catastrophic health events

Best for

• SMBs wanting to offer health benefits without insurance complexity
• Diverse workforces with different health needs
• Companies prioritizing employee choice

Deep Dive: Lifestyle Spending Account (LSA)

How it works

You allocate a fixed amount per employee (e.g., $1,000/year) for categories you define. Employees submit receipts and receive reimbursement (treated as taxable income).

What it can cover

You decide. Common categories include:

Wellness:

• Gym memberships and fitness classes
• Fitness equipment (bikes, weights, yoga mats)
• Sports league fees
• Meditation and wellness apps

Professional development:

• Courses and certifications
• Books and learning subscriptions
• Conference attendance
• Professional association dues

Lifestyle:

• Pet care (vet bills, grooming)
• Childcare
• Elder care
• Home office equipment
• Internet and phone bills
• Transit and commuting

Financial wellness:

• Financial planning services
• RRSP/TFSA advisory fees

Advantages

• Maximum flexibility: Cover anything you decide to include
• Culture alignment: Design categories around your company values
• Modern appeal: Attracts talent who want personalized benefits
• Cost control: Fixed allocation, no surprises

Limitations

• Taxable to employees (reduces net value by ~30%)
• Not tax-deductible as a PHSP (different tax treatment for employer)
• Requires clear policy on what's eligible

Best for

• Companies emphasizing culture and wellness
• Remote-first teams (home office, internet, co-working)
• Organizations that want to differentiate with unique benefits

Deep Dive: Traditional Group Insurance

How it works

You (or your broker) select a benefits plan from an insurance carrier. You pay monthly premiums. Employees access defined coverage for health, dental, vision, life insurance, and disability.

What it typically covers

• Extended health: Prescription drugs, paramedical, hospital
• Dental: Preventive, basic, major, orthodontics
• Vision: Exams, glasses, contacts
• Life insurance: Death benefit
• Disability: Short-term and/or long-term income replacement

Advantages

• Catastrophic protection: Covers major health events
• Familiar: Employees understand how insurance works
• Comprehensive: Can include life and disability coverage
• Pooled risk: One expensive claim doesn't blow your budget

Limitations

• Cost unpredictability: Premiums can increase 10-25% annually based on claims
• Low flexibility: Employees get the same coverage whether they need it or not
• Waste: Premiums paid for coverage never used
• Complexity: Deductibles, coinsurance, coverage limits, exclusions
• Commission drag: Broker commissions built into premiums

Best for

• Companies wanting life and disability coverage
• Industries with higher health risks
• Organizations with employees who value traditional benefits structure
• Those needing protection against very high medical costs

The Modern Approach: Combining Options

Many Canadian companies are moving to hybrid models:

Model 1: HSA as Primary + Catastrophic Insurance

Structure:

• HSA for routine expenses ($2,000-3,000/employee)
• Basic catastrophic insurance for major health events
• Skip the comprehensive dental/vision insurance

Why it works:

• Employees have flexibility for everyday needs
• You're protected against major claims
• Overall cost is often lower than traditional insurance

Example costs:

• HSA: $2,500/employee/year allocation + $6/month admin
• Catastrophic insurance: $30-50/employee/month
• Total: ~$350/employee/month (variable based on claims and insurance)

Model 2: HSA + LSA (No Traditional Insurance)

Structure:

• HSA for medical expenses ($2,000/employee)
• LSA for lifestyle/wellness ($1,500/employee)
• No traditional insurance

Why it works:

• Maximum flexibility and employee choice
• Simple administration
• Predictable costs (you set the allocations)
• Appeals to younger, healthier workforces

Example costs:

• HSA: $2,000/employee/year + $5/month admin
• LSA: $1,500/employee/year + $3/month admin
• Total: ~$390/employee/month (no variance)

Model 3: HSA + LSA + Traditional Insurance

Structure:

• Scaled-back traditional insurance (lower coverage limits)
• HSA to top up health expenses beyond insurance
• LSA for wellness and lifestyle

Why it works:

• Comprehensive coverage
• Flexibility where insurance falls short
• Satisfies employees who want "real insurance"

Example costs:

• Traditional insurance: $150-250/employee/month (variable)
• HSA: $1,000/employee/year + $4/month admin
• LSA: $1,000/employee/year + $3/month admin
• Total: ~$350-450/employee/month (partially variable)

Decision Framework

Ask yourself these questions:

1. How diverse is your workforce?

• Diverse (age, family status, health needs): HSA or HSA + LSA wins
• Homogeneous (similar demographics): Traditional insurance may fit

2. What's your budget predictability need?

• Need to lock in costs: HSA/LSA (fixed allocations)
• Can absorb variability: Traditional insurance

3. What does your team value?

• Choice and flexibility: HSA + LSA
• Traditional security: Group insurance
• Ask them: Survey before deciding

4. What's your risk tolerance?

• Worried about catastrophic events: Include some insurance
• Comfortable with employee-level risk: HSA covers most needs

5. What's your admin capacity?

• Minimal HR bandwidth: Simple HSA/LSA with good platform
• Dedicated benefits admin: Can handle insurance complexity

Common Questions

Can we switch from traditional insurance to HSA? Yes, many companies do this annually at policy renewal. Give employees adequate notice and communicate the change clearly.

Will employees be upset losing "insurance"? Some may initially resist. Frame it as "more money, your choice." A $2,500 HSA often provides more value than a $2,500 insurance premium.

What about catastrophic expenses? HSA allocations can be set high enough for most needs. For true catastrophes, consider keeping a basic insurance layer or directing employees to provincial programs.

How do we handle employees with high medical needs? HSA allocations can be adjusted. Some companies offer tiered allocations or allow employees to opt into different coverage levels.

The Bottom Line

There's no universal "best" option. But the trend is clear: Canadian SMBs are moving toward flexibility.

Traditional group insurance made sense when workforces were homogeneous and employees stayed for careers. Today's workforce wants choice, personalization, and benefits that fit their lives.

For most SMBs, an HSA (for health) combined with an LSA (for wellness/lifestyle) offers the best balance of coverage, flexibility, and cost control.

Ready to build a flexible benefits package? Tedy makes it easy to offer HSA and LSA benefits that employees actually use. [See how it works →]

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