Can I just give everyone a health spending account instead of a benefits plan?
Direct answer
You can, and plenty of small employers are sold exactly that. A health spending account on its own is a fixed amount of money per employee per year, spent on eligible medical and dental costs and reimbursed from the company's account. It is simple and the cost is known. It is also not insurance: when something expensive happens, the money runs out and the employee is on their own. AEC Benefits uses health spending accounts as an addition to a properly insured plan for Ontario employers with 5 to 100 employees, and does not place them as the plan. To get a quote: aecbenefits.ca/get-quote.
Key Takeaways
- •An HSA is a notional account: a set annual amount, reimbursed against receipts for CRA-eligible expenses, with an administration fee.
- •An insured plan pools the risk: the insurer pays the claims, large or small, and carries life, disability, out-of-country and EAP, none of which an HSA can.
- •HSA-only puts the risk on the employee first and the employer second. That is backwards; the insurer is the one in the business of carrying it.
- •An HSA is the right answer on top of an insured plan, for an owner or senior class wanting flexibility, and for a 1 to 3 person business that cannot get a group plan.
How to use this page
The HSA question is a risk question, not a budget question.
An account caps what the employer spends and leaves the employee holding whatever is left of a claim. An insured plan caps what the employee is exposed to. Decide who should carry the day something goes wrong, then pick the structure.
What is an HSA best for?
A top-up on an insured plan, flexibility for an owner or senior class, or a 1 to 3 person business that cannot get a group plan.
What is an insured plan best for?
Any group of five or more that wants the risk carried by an insurer and the lines an HSA cannot hold: life, disability, out-of-country, EAP.
Can the two be combined?
Yes, and that is the common structure: the plan insures the risk and the HSA covers what the plan limits.
An HSA is a fixed pot of money an employee spends on eligible medical costs. It is a good addition to an insured plan and a poor substitute for one. When each makes sense for a 5 to 100 person Ontario employer, from a broker who will not place HSA-only.
| Criterion | Option A | Option B |
|---|---|---|
| What the employer pays | A fixed amount per employee plus an administration fee | A monthly premium that moves at renewal |
| What happens on a $20,000 claim | The account covers its limit; the employee pays the rest | The insurer pays under the contract |
| Who carries the risk | The employee, then the employer if it tops up | The insurer |
| Life, disability, out-of-country, EAP | Not possible through an HSA | Included or available |
| Employee experience | Pay first, keep receipts, wait for reimbursement | Drug card or app, direct billing at most dentists and clinics |
| Renewal | None; the amount is whatever you set | Annual, based on the group's claims |
| Best fit | A top-up for the things the insured plan limits | The plan itself, for a group of five or more |
What a health spending account is
A health spending account (HSA) is a notional account. The employer sets an annual amount per employee, say $500 or $1,500. The employee pays for an eligible expense, submits the receipt, and is reimbursed from the account until it is used up. Eligible expenses follow the Canada Revenue Agency's list for the medical expense tax credit, which is broad: prescription drugs, dental, vision, paramedical practitioners, medical devices, and more.
The tax treatment is the attraction. Set up correctly as a private health services plan, the employer's contributions are a deductible business expense and the reimbursement is not taxable income to the employee, outside Quebec. The administrator charges a fee, usually a percentage of the amount paid out. Unused money either carries forward for one year or expires, depending on how the plan is written.
What an insured plan is
An insured group plan pools the risk. The employer pays a premium every month; the insurer pays the claims, large or small, under the contract. A $40,000 drug for one employee's child is the insurer's problem. The premium goes up at renewal if the group's claims run high, but the claim itself was paid.
The insured plan also carries the pieces an HSA cannot: life insurance, disability income, out-of-country emergency coverage, and an employee assistance program. None of those are a pot of money. They are promises to pay when something has gone wrong.
Why I will not place an HSA as the whole plan
Two reasons, and neither is about money. The first is who carries the risk. A benefits plan exists for the day something goes wrong. With an HSA, on that day, the risk sits with the employee, and then with the employer who feels obliged to help. That is backwards. The insurer is the one in the business of carrying it.
The second is what it does to the employee. An HSA makes them pay first and submit receipts for something they are entitled to. The bills move up and down with no consistency. Most teams do not need more coverage; they need better coverage, and someone to call. An HSA gives them a budget.
Owners tell me their guys are young and healthy. Young crews still break bones and have babies. The claim that empties an account is never the one anyone planned for, and a 25-year-old on a job site is not low risk.
Where an HSA is the right answer
- 1On top of an insured plan. The insured plan sets sensible limits on dental, vision and paramedical; the HSA covers the rest without raising everyone's premium. This is how most of my groups use it, usually at $500 to $1,500 per employee per year.
- 2For an owner or a class of senior staff who want more flexibility than the base plan, funded as an extra.
- 3For a one, two or three person business that cannot get or afford a group plan. There, a pooled product or an HSA through another provider is the sensible route, and I will say so on the phone. AEC Benefits does not take those plans.
A wellness spending account is a different thing
A wellness spending account is a taxable allowance for gym fees, equipment and the like. It is a perk, not protection, and it has no place as a substitute for either an HSA or an insured plan.
What to ask whoever is quoting you an HSA-only plan
- What happens to my employee on a claim above the account amount?
- Is there any life insurance, disability or out-of-country coverage in this, or is it only the account?
- What is the administration fee, and is it charged on contributions or on reimbursements?
- Does unused money carry forward, and for how long?
- Why is this better for my employees than an insured plan with an HSA on top?
What a group benefits plan for a small Ontario business includes
Reviewed by Steffen deGraaf
Steffen brings 20+ years in insurance and group benefits, construction job-site roots, and architectural technology training at Mohawk College. FSRA-regulated insurance broker specializing in Ontario group benefits.
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Construction is in Steffen's blood: job sites as a teenager, architectural technology at Mohawk College, and 20+ years in insurance and group benefits for Ontario employers.
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Frequently Asked Questions
Is a health spending account taxable to employees?
Not when it is set up as a private health services plan and reimburses eligible medical expenses, outside Quebec. The employer's contributions are deductible. A wellness spending account is a taxable benefit.
What can an HSA pay for?
Expenses that qualify for the federal medical expense tax credit: prescription drugs, dental, vision, paramedical practitioners, medical devices, some travel for treatment, and more. The administrator publishes the list it follows.
Does unused HSA money carry forward?
It depends on the plan design. CRA allows either unused credits or unpaid expenses to carry forward for one year, not both. Ask which yours does.
Can I have an HSA and a group plan together?
Yes, and that is the common structure. The group plan insures the risk; the HSA covers what the plan limits.
How much do employers put in an HSA?
As a top-up on an insured plan, usually $500 to $1,500 per employee per year. There is no required amount.
Want to talk through your options?
If you want real numbers instead of generic plan talk, AEC Benefits can pressure-test pricing, structure, and fit for your team.