Shareholders and the Element of Risk
Updated: Sep 7
Can shareholders have an HSA? There’s a lot of noise around this, I think it’s time we clarify our thoughts. First, a disclaimer – we are not accountants, the client’s accountant should have the final say when it comes to their client’s plan design. If the CRA comes knocking on the door, the accountant will be defending the plan and the shareholder’s participation.
Recently at an accounting conference, someone from the CRA said shareholders cannot have an HSA. You can follow the link to find the actual document. I think very few read the document and in turn are missing a major point.
First, they outline perfectly how a shareholder can have the benefit of an HSA. Then they make the same argument that we have always made, that Cost Plus plans are not onside. So, to be clear, they are talking about Cost Plus not an HSA with a plan limit that is upheld.
They say the Cost Plus plan is not in the nature of insurance - and I fully agree!
Let’s break this down a bit. The CRA created Private Health Spending Accounts (PHSP) in the 80’s, I think the intention was to allow some tax advantages for small businesses that may not qualify for insured benefits. Our industry has done ourselves no favours and we call these PHSPs all sorts of names - Cost Plus, Health Spending Account (HSA), Health Saving Plans, Health and Welfare Trusts (HWT), Self-Insurance. The problem with grouping them together, is they are fundamentally different plans:
Cost Plus: a limitless plan that reimburses employees for their cost (expense) plus charge an admin fee per claim. Insurers are the only ones that I know of that operate these and only they can operate one.
HSA: These plans have a specific limit for the employee each year. You can carry over expense or balances for one year only. You cannot accumulate a balance that grows year over year.
HWT (Health and Welfare Trust): These are no longer in operation as of January 1, 2022 and had to be shut down or be converted to an Employee Life and Health Trust (ELHT). The trust would manage employer funds on behalf of employees. This can include accruing balances and all sorts of complexities to run, typically, a very large multi-employer, self-insured benefit plan.
Different CRA documents explain how each type of PHSP needs to operate. Many people think of all these options as self-insurance and not a plan of insurance; however, that is not true. The reason you get the favourable tax treatment is because the CRA is stating that these have to be plans of insurance. With insurance group benefit plans, the premiums for the extended health care, dental, and vison are tax-free - just like an HSA. So, the business can write off the expense to the company and it is a tax-free benefit to the employee. The document points directly to the need for an element of risk to qualify as a PHSP.
“if the plan or arrangement is such that there is little risk that the employee will not eventually be reimbursed for the full amount allocated to that employee annually, then the arrangement is not a plan of insurance and therefore, not a PHSP. “
Cost Plus clearly does not meet this definition and is offside.
Now, how do you set up the HSA in a way that meets the CRAs definition and qualifies as a PHSP? Well, they also define that well. There are two things that are very important to discuss:
the plan limit
the plan operation after it is set up.
Determining a plan limit
An HSA can never be given to a shareholder based on their role as a shareholder. The CRA is clear that the HSA is to be set up for ‘employees’ – this means the shareholder must also be an employee, active in the daily operations to participate. Ideally, the shareholder-employee is drawing T4 income to easily establish there is an employer – employee relationship. Some accountants will argue for or against the necessity for T4, regardless, they have the same job at the end of the day – to demonstrate the shareholder is an employee for all intents and purposes.
Now the hard question: what amount should they get? The CRA does not explicitly lay this out, only that it must be reasonable. Below are the questions that the CRA outlines to determine if it is a shareholders benefit or not. Many advisors look at this at first and think their clients cannot have an HSA but again, you need to read to the end.
Our rule of thumb, what is reasonable and fair? If the shareholder-employee took a similar role at another company, what would their benefits and compensation look like? It’s important to normalize their compensation to what a non-shareholder is offered in-house or elsewhere.
In many cases a simple traditional plan offered will cost $5,000 a year, and then you also must consider total compensation. If you were in a similar role at another company as an employee you may participate in traditional benefits, HSA, higher salary, bonuses, group RRSP, etc. Can the value of the compensation you get from your corporation be comparable to what you may receive in a similar role? I strongly believe that this common sense approach to creating a balance is key. As always, the company’s accountant should help determine reasonableness, as well as document reasons for coming up with a balance.
How the plan is operated after setup, especially if an employee is also as shareholder, is important because if you read the CRA document they bring up the fact that a limit must be upheld. Once the reasonable plan limit is established, it also must be upheld and NOT increased if the employee (shareholder) has costs that exceed the limit. If the plan is increased when expenses are higher, this removes the element of risk. The plan must stay intact and not change unless there is a reason based on the status of employment that warrants an increase or decrease in compensation. Our general response when asked to change a plan mid-year is below:
If you are increasing the balance because an employee has incurred expenses greater than the plan limit set it would be seen as offside with the CRA to increase the limit mid-year
In any situation we always recommend you get the sign off from the corporate accountant
In summary I think way too many people still have the unfounded belief that one person corporations cannot have an HSA and many have not taken the time to fully learn how to go about offering them. Is it crystal clear? Absolutely not. It is grey, but doable and if you are the type of advisor that works with client’s accountants it can be a great way to add value that their clients accountant probably does not have knowledge in.
COO & Co-Founder