We are often asked about Health Spending Account limits - specifically what the yearly maximum allowble amount is for a business owner and her family.
Why are there limits in a Health Spending Account?
A Health Spending Account is an arrangement where an employer reimburses an employee for the cost of medical care. This is valid where an employer is obligated, under a contract, to reimburse such expenses incurred by the employee and their dependents. The reimbursement to the employee is tax free and deductible by the employer.
Part of the contract must stipulate the nominal value (amount of benefit or limit) of the medical expenses paid out in any one year. Canada Revenue Agency (CRA) does not offer or explain what a set amount should be for a Health Spending Account. Rather, in CRA's words, the amount must be “reasonable”.
Reasonable is not defined but left up to the discretion of an administrator and an employer to establish. Without some benefit amount being stipulated, the HSA would not provide a reasonable degree of risk in order to meet the definition provided for in subsection 248(1) of the Act and would be considered a taxable benefit. That fact is the plan would not qualify for tax free health benefits if annual limits were not in place.
What is the benefits limit for a Health Spending Account?
To establish benefit amount comparisons to traditional plans of insurance is an exercise in futility as one is comparing apples to oranges. After nearly twenty years of administration experience, it is believed a reasonable maximum benefit level per year is $15,000 per employee.
Who determines the benefits limits and how are they designated?
Limits are determined by classification of employee. For example, Executives might receive $15,000, Senior Mangement $5,000 and Full Time $1,500. A general rule of thumb, staying in line with CRA's criteria for "reasonble" limits, is to ensure the highest limit within a HSA does not exceed ten times that of the lowest limit. The thinking here is that a Health Spending Account cannot be tilted excessively in favor of the executive class or the HSA could be deemed a sharedholder benefit. A sharedholder benefit is taxable and would disqualify the HSA.
Send this guide to your Accountant or download it for yourself to get a financial overview of Health Spending Accounts:
Related Reading:
What's covered in a Health Spending Account?
How does a Health Spending Account work for a small business in Canada?
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