As a sole proprietor, navigating the world of healthcare benefits can be challenging. With the rising costs of medical expenses, finding ways to manage healthcare expenses efficiently becomes crucial. One option that has gained popularity in recent years in a Healthcare Spending Account (HSA). However, CRA has specific rules that you should pay attention to when thinking about using an HSA for your sole proprietorship.

What is a Healthcare Spending Account?

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A Healthcare Spending Account (HSA) is a employee benefit that allows a company to provide their team with a set spending account that can be used to reimburse eligible medical expenses. They can cover a wide range of medical expenses including dental, vision, prescriptions and medical practitioners like chiropractors and massage therapists.

Benefits For Sole Proprietors

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For sole proprietors, HSAs offer 3 major benefits:

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1. Tax Savings: Any expenses reimbursed through an HSA is tax-free to the user. This means you never have to worry about income tax, CPP or EI contributions on your claimed expenses.

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2.  Flexible Spending: Unlike traditional personal health plans, HSAs provide incredible flexibility to the user on how they would like to use their benefits. Whether it’s a new pair of glasses, braces or prescriptions, HSAs provide unparalleled flexibility in how you can customize your benefits.

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3. Control Over Cost: Unlike a traditional health plan, you only pay for the benefits that you use with no worries about premiums or unused benefits. Plus, with the BeniPlus Wallet their is no set up cost or ongoing fees.

Limitations and Considerations

While HSAs offer significant benefits, CRA does place a few requirements on sole proprietors that would like to participate in Healthcare Spending Accounts:

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1. Arm’s-length Employee Requirement: In order to participate in an HSA you must have 2 arm’s length employees. Employees who are family members, do not count under the CRA interpretation. These employees must receive a T4 from the company and cannot be independent contractors.

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2. Annual Limit for Sole Proprietors and Family Members: CRA sets specific limitations on the annual HSA limits for sole proprietors. They limit an HSA to:

a. A maximum of $1,500 for yourself.

b. A maximum additional $1,500 for your spouse or common-law partner, and each household member that is 18 years of age or older at the start of the period they were covered.

c. A maximum adittional $750 for each household member under the age of 18 at the start of the period.

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3. Qualified Medical Expenses: HSAs can only be used for qualified medical expenses as determined by the CRA. Many of the wider wellness related expenses can only be covered by a Wellness Spending Account which is taxable to the user.

Bottom Line

For sole proprietors, Healthcare Spending Accounts (HSA)s can be a valuable tool for small businesses and their owners to save on medical expenses and provide their team with improved access to health. The tax advantages, flexibility, and the control offered by HSAs make them an attractive option for small business and self-employed individuals, as long as they fit the requirements laid out by the CRA. By carefully evaluating your business and needs, you can determine whether an HSA is the right choice for you.

For more information, speak to one of our benefits experts today!

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