What is a Health Spending Account?

A Health Spending Account (HSA) is a tax-free benefit that employers provide to employees for medical expenses not covered by provincial health plans or other insurance. Think of it as a dedicated pool of money each employee can use to pay for eligible health-related costs.

Here's the key difference from traditional insurance: with an HSA, employees choose how to spend their allocation based on their individual needs. There's no one-size-fits-all coverage—just flexible dollars that adapt to each person's situation.

How Does an HSA Work?

The mechanics are straightforward:

1. Employer allocates funds: You decide how much to give each employee annually (e.g., $1,000/year)
2. Employee incurs an expense: They visit a dentist, buy prescription glasses, or see a physiotherapist
3. Employee submits a claim: They upload their receipt to the HSA platform
4. Reimbursement is processed: The employee receives tax-free reimbursement

No premiums. No deductibles. No waiting for insurance approval. Just direct reimbursement for eligible expenses.

What Expenses are Eligible Under an HSA?

HSA-eligible expenses are defined by the Canada Revenue Agency (CRA) and include a wide range of medical costs:

Common eligible expenses:

• Dental care (cleanings, fillings, orthodontics)
• Vision care (glasses, contacts, eye exams, laser surgery)
• Prescription medications
• Physiotherapy and massage therapy
• Mental health services (psychologists, counsellors)
• Chiropractors and osteopaths
• Medical equipment and supplies
• Fertility treatments
• Hearing aids

Often-overlooked eligible expenses:

• Travel medical insurance
• Service animals
• Air conditioners (with a doctor's note for specific conditions)
• Gluten-free food (for diagnosed celiac disease)
• Tutoring services (for learning disabilities)

The full list from the CRA is extensive—employees are often surprised by what qualifies.

HSA Tax Benefits: Why This Matters

The tax treatment of HSAs makes them remarkably efficient:

For employers:

• HSA contributions are a 100% tax-deductible business expense
• No payroll taxes (CPP, EI) on HSA amounts
• Predictable budgeting—you set the allocation

For employees:

• Reimbursements are completely tax-free
• Unlike salary increases, there's no income tax on HSA benefits
• A $1,000 HSA is worth more than a $1,000 raise

Example calculation: If you give an employee a $1,000 raise, they might keep $600-700 after taxes. But a $1,000 HSA allocation delivers the full $1,000 in value—a 30-40% efficiency gain.

HSA vs. Traditional Group Insurance: Key Differences

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Who is an HSA Best For?

HSAs work particularly well for:

• SMBs (10-200 employees) who want to offer meaningful benefits without insurance complexity
• Diverse workforces where employees have different health priorities
• Companies with tight budgets who want cost predictability
• Organizations valuing employee autonomy and personalization
• Startups building their first benefits package

Common HSA Structures

Fixed annual allocation: Every employee receives the same amount (e.g., $1,500/year). Simple to administer and communicate.

Tiered by role or tenure: Different amounts for different groups (e.g., managers get $2,000, others get $1,500). Reflects organizational structure.

Family vs. single: Higher allocations for employees with dependents. Recognizes different family needs.

Flex credits: Employees can allocate between HSA and other benefits (like LSA). Maximum personalization.

Setting Up an HSA: What You Need

To offer an HSA in Canada, you need:

1. A Private Health Services Plan (PHSP): The legal structure that makes the HSA tax-free. Most providers handle this for you.
2. An administrator: A platform that processes claims and manages the program. This is where you submit receipts and track balances.
3. Clear policies: Decide on allocation amounts, carry-over rules, and coverage for dependents.
4. Employee communication: Help your team understand how to use their HSA effectively.

HSA Costs: What Will You Actually Pay?

Unlike traditional insurance where premiums can be unpredictable, HSA costs are straightforward:

Your costs include:

• The allocation itself (what you give employees)
• Administration fees (typically $4-8 per employee per month)
• That's it—no hidden fees or surprise increases

What you won't pay:

• Commissions to brokers
• Premiums that rise with claims
• Coverage for things employees don't need

With a SaaS-priced HSA platform like Tedy, you pay a predictable per-employee fee. If employees don't claim their full allocation, you keep the difference.

Frequently Asked Questions

Can an HSA replace traditional group insurance entirely? For many SMBs, yes. An HSA covers the most common employee health needs. Some companies combine HSA with catastrophic coverage for major expenses.

What happens to unused HSA funds? This depends on your policy. Options include: carry-over to next year, use-it-or-lose-it, or pooling unused funds for future allocations.

Can employees cover their families? Absolutely. Employees can use their HSA allocation for their spouse and dependent children's eligible expenses.

How quickly are claims processed? With modern platforms, reimbursement typically happens within 2-5 business days.

Is there a minimum company size? No—even sole proprietors can set up an HSA, though the rules differ slightly for owner-operators.

The Bottom Line

Health Spending Accounts offer Canadian employers a simpler, more flexible, and often more cost-effective way to provide health benefits. Instead of paying premiums for coverage employees may never use, you give them direct control over health dollars that matter to them.

For SMBs looking to attract talent without the complexity and unpredictability of traditional insurance, HSAs are worth serious consideration.

Ready to explore an HSA for your team? Tedy makes it simple to set up and manage flexible Health Spending Accounts. Learn how it works →

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