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Mythbusters Edition

Updated: Jan 25

 Disclaimer: these are interpretations by myHSA and do not constitute tax advice, an accountant should always be consulted

 

"Companies with only one shareholder-employee cannot have a health spending account." 

FALSE

When set up correctly, a sole business owner as the sole employee can have a health spending account. Key factors include establishing a fair limit compared to industry peers and ensuring an 'element of risk.' This particular arrangement has faced increased scrutiny in recent years after this article was released in 2022. But in comparing the HSA and Cost-plus as noted in the article, it’s very important to understand they are not one in the same. Setting an annual limit, before claims are known, is the crucial difference between Cost-Plus and HSA, as it removes shareholder control and incorporates risk.


“What HSA’s are acceptable:

Incorporated businesses, including shareholder employees and all other corporate employees, are eligible to participate in an HSA. Corporations with as few as one employee can be eligible as well.” 

 

"The shareholder MUST be earning a T4 income to set up a health spending account."

FALSE…but it’s a good idea

 When a shareholder participates in an HSA, it’s assumed to be a shareholder benefit until the facts prove otherwise. When only taking dividends – that isn’t going to be a fact you can use in your defense. On the other hand, T4 would indicate there is an employer-employee relationship.  


When the Buyer Beware When it Comes to Health Spending Accounts article first came out, it looked like this:

 “What HSA’s are acceptable: Incorporated businesses, including shareholder employees and all other corporate employees, are eligible to participate in an HSA. Corporations with as few as one employee can be eligible as well. However the HSA cannot be solely for shareholders unless the shareholders are also employees earning a T4 income.


This was the first time we saw ‘T4 income’ mentioned by CRA. Not long after this initial version was published, a revised version was released, and this line was removed. Now, you won’t find mention of T4 anywhere. So although T4 would be a good fact to use in defense of it being an employee benefit rather than shareholder benefit, it is not imperative.

 

"The business owner has unlimited discretion at choosing their HSA limit and can make plan changes as they wish." 

FALSE

Business owners should work with their advisor and accountant to determine a reasonable health spending account limit. The general advice is to set a limit that's no more than 10-15% of what someone in their role would normally make in a year ie. normalized income. This helps to make sure the limit is fair and not too high, stopping it from covering extremely expensive medical procedures.  


Additionally, the plan limit should not be increased mid-year to accommodate expenses, something we strongly discourage among advisors and clients.   To maintain the integrity of the plan, the limit should be set at the start of the year and not adjusted until the following renewal.

 

"For the purposes of the new Canada Dental Benefit - A health spending account counts as Dental Coverage and must be reported on employee’s T4s."

TRUE

Yes – the CRA does consider a Health Spending Account as Private Dental Insurance.  When the plan sponsor is completing T4s, they must indicate the employees had dental coverage, regardless of usage or HSA plan amount.

 

"Unused HSA credits can be rolled into an employee’s RRSP."

FALSE

Unused HSA credits CANNOT be rolled into an RRSP at the end of the year. HSA dollars can only be used for qualified medical expenses and by redirecting the funds outside of a PHSP, the plan is no longer onside.  Here's where the CRA clarifies:


The myFlexplan can be used to avoid these situations, the decision to allocate to RRSP will be made at the beginning of the year rather than the end. This keeps the plan onside.

 

"Only items mentioned in the METC list can be covered by an HSA."

True… but there's a little wiggle room

The CRA says that 90% or more ("all or substantially all") of the expenses claimed through the HSA must appear on the METC list; therefore, roughly 10% don't need to. It's important to note, the 10% is not based on the plan members annual limit, but instead 10% of their eligible expenses processed in that year. Read more about the 10% rule here.


I don't think the CRA is offering this buffer to be claimed from intentionally, but rather a way to cover necessary expenses not listed. It's also helpful in situations where the list is out-dated, and a modern perspective can be applied.

 


 


Allison Gigliotti

Head of Growth

myHSA

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