“Fast, good, or cheap – pick two” is a common mantra in business, marketing, and many other areas of life. But it doesn’t have to apply to employee benefits.
Employee spending accounts, including HSA or FSA options, are a hot topic in employee compensation right now precisely for their ‘golden trifecta’: they are easy, affordable, and employees love them.
Two current trends are bringing employee spending accounts to employers’ attention.
First, today’s workforce has come to expect employee health benefits as part of their total compensation package. Younger generations in particular expect even more diversity and flexibility in the health benefits they can use. Second, healthcare costs are rising (aren’t they always?), making it harder for employers to support comprehensive benefit plans.
In this guide, we’re going to explain what you need to know about the different types of spending accounts and how they might benefit your business and your employees.
What are employee spending accounts?
Employee spending accounts (we’ll call them spending accounts, or SAs) are a common component of employee benefits plans. Employers use spending accounts to set aside a fixed dollar amount that employees can use on a set of approved expenses.
SAs can be allocated to almost any type of employee expense, such as travel, electronics, or training. However, the ones we’ll discuss in this article (HSA, FSA, and WSA) are specifically for employee health and wellness.
Think of spending accounts as a piggy bank exclusively for your employees’ health care spending.
Think of spending accounts as a piggy bank exclusively for your employees’ health care spending.
One advantage of health spending accounts is that many expenses, including prescription drugs, orthotics, or physiotherapy, are tax exempt. This means that employees don’t pay tax, and employers can write them off as a 100% business expense.
Note: Not all expenses are tax-free. We’ve included a list of eligible expenses later in the guide.
How do they work?
Much like a traditional benefits package, employee spending accounts can be set up through most insurance companies and third-party administrators. Your benefits broker can assist you to find the SA that best fits the needs of your staff.
The employer sets the terms and enrols their employees. After that, there’s hardly any work to be done. Employees can submit claims to their insurance company or plan administrator and receive reimbursement until they reach their maximum allotment for the year. Employers can choose to let unused funds rollover, but it’s more common for SAs to reset every year.
Traditional Group Benefits vs. Employee Spending Accounts
The main differences between traditional group benefits and employee spending accounts are flexibility and cost-control.
Where traditional group benefits have specific limits for each health care coverage item (i.e. prescription drugs, dental, vision, etc.), spending accounts let employees personalize how and where they will spend their health care dollars.
In terms of cost control, it doesn’t get better than employee SAs. Employers set the maximum spending allotment every year, allowing them to stay well-within their budget—whether that’s $500 or $5000 per employee. Annual costs are also fixed, as there are no premiums or deductibles to calculate.
Spending accounts work for companies of all types. SAs can be used as a ‘main feature’ of a benefits plan or as a compliment. They are suitable for companies who have existing coverage or who are getting a benefits plan for the first time.
SAs are suitable for companies who have existing coverage or who are getting a benefits plan for the first time.
If you don’t currently offer group benefits, spending accounts are an easy and affordable way to cover your employees’ basic health needs (including medical, dental, vision, paramedical services, assistance devices, etc.) without the complexity or paperwork of a traditional plan.
If you already offer group benefits and are looking for ways to offer more flexibility, attract top talent, and incentivize your employees to lead healthy lifestyles, spending accounts are an attractive add-on to help cover more costs or even pay off existing coinsurance.
HSA vs. FSA vs. WSA : What’s the difference?
Despite the many acronyms floating around, there are just three types of employee spending accounts available in Canada: Health Spending Accounts, Wellness Spending accounts, and Flexible Spending Accounts.
Here is a handy chart showing the key differences of each. Keep scrolling for a more detailed breakdown:
|What is it?||Health Spending Account: a non-taxable account for health care needs||Wellness Spending Account: a taxable account for wellness or ‘lifestyle’ expenses||Flexible Spending Account: a cafeteria-style mix of both taxable and tax-free health and wellness benefits|
|Does it go by other names?||HCSA (Health Care Spending Account) or PHSP (Private Health Spending Account||LSA (Lifestyle Spending Account)||Hybrid Employee Spending Account|
|What is covered?||Health expenses approved by the CRA (medical, dental, vision, orthopaedics…)||Any expense that promotes a healthy, balanced lifestyle (gym memberships, vitamins, personal training, or cosmetics.) All covered expenses are at the employer’s discretion.||All HSA items plus any WSA expenses chosen by the employer.|
|Who is it for?||Businesses with modest budgets who want to offer flexible and affordable healthcare to their employees.||Employers who already cover basic health and are looking for unique ways to attract and reward employees.||Organizations with significant diversity in health|
1. HSA (Health Spending Account)
An HSA, or Health Spending Account, is a non-taxable account for health care needs.
Also known as a Health Care Spending Account (HCSA) or a Private Health Services Plan (PHSP), an HSA is a self-insured, tax-free fund you can provide your employees to cover a wide range of medical, dental, or vision expenses.
A Health Spending Account essentially transforms personal medical expenses into a deductible business expense for the employer and tax-exempt benefit for the employee.
An HSA transforms personal medical expenses into a deductible expense for the employer and tax-exempt benefit for the employee.
Though still relatively new to many employers, Health Spending Accounts have actually been around since the 1980s, and nearly all insurance providers offer them. Either as a standalone or add-on benefit, HSAs maximize employee benefits while reducing actuarial, administrative, and adjudication fees for employers.
So, what’s covered under an HSA?
HSAs stretch health care dollars further than other types of SAs. They are 100% tax-deductible for businesses and employees do not pay tax on their purchases.
The CRA determines eligible HSA expenses. They include many of the medical costs employees expect from a traditional group benefits package, plus a wide range of additional health-related services, facilities, and devices.
These include, but are not limited to:
- Health practitioners, including registered massage therapists, chiropractors, and psychologists
- Assistance devices and equipment, including prescribed orthopaedics, hearing aids, and CPAP machines
- Prescription drugs, such as insulin for diabetes or vitamin B12 for anaemia
- Hospitals, care, and facilities, including care in a nursing home
- Dental care, including preventative, diagnostic and restorative (not cosmetic)
- Additional expenses, such as laser eye surgery, radiological procedures, rehabilitative therapy and more.
Want to know what else is covered? Browse our full list of HSA eligible expenses.
Key advantages of an HSA:
Health Spending Accounts are ideal for incorporated small and medium businesses who want to:
- Control benefits costs while covering a wide range of expenses
- Give their employees flexibility in covering their health care needs
- Avoid high admin fees and premium increases
- Avoid prefunding unused benefits
- Attract and retain talent
- Offer additional benefits to specific employees or classes of employees (i.e. executives)
Note: HSAs are only available to incorporated business owners with arm’s length employees. Unincorporated business owners may not be able to deduct medical expenses from business income. If you aren’t sure, we suggest that you consult a benefits broker.
2. WSA (Wellness Spending Account)
A WSA, or Wellness Spending Account, is a taxable account for wellness or ‘lifestyle’ expenses. These include gym memberships, vitamins, personal training, or cosmetics.
WSAs are best for companies who already cover basic health and are looking for unique ways to attract and reward their employees. Employers can use WSAs to offer financial incentives while still controlling how those after-tax dollars are spent.
Also known as a Lifestyle Spending Account (LSA) or Personal Spending Account (PSA), a WSA is a powerful way to create a culture of health, wellness, and appreciation at your organization.
A WSA is a powerful way to create a culture of health, wellness, and appreciation at your organization.
Like an HSA, WSAs give employees the freedom to choose how and where to spend their WSA dollars. However, because they are taxable, WSA expenses are not limited by the CRA’s Income Tax Act. In fact, the only limitation to what can be covered is what you, the employer, decide.
Offering a WSA is similar in some ways to offering a cash bonus to reward employees. The difference is that with a WSA, you can ensure that your employees are investing in their health and wellness—which can in turn increase their productivity, engagement, and overall wellbeing.
What is covered with a WSA?
This is where you can get creative—and competitive. “A Wellness Spending Account is usually set up by an employer to encompass what the company believes are items they would like to reward and use to attract their staff,” explains Calgary-based myHSA.
You can customize the WSA to cover exactly what you need based on your business objectives.
For example, if your goal is to promote better workplace health to improve productivity and reduce absenteeism, choose benefits that take a proactive approach to health. If you want to retain talent, choose benefits that reflect your employees’ unique needs (for example, daycare, smoking cessation programs, or eldercare.)
Additional WSA expenses could include:
- Gym or club memberships
- Nutritionists and vitamins
- Personal training
- Teeth whitening
- Marriage counseling
- Smoking cessation programs
- Elder care or child care
- Over the counter medication
- Dermatology or cosmetic treatments
- Medical marijuana
- The list goes on
Key advantages of WSA:
WSAs are ideal for small to large businesses who want to:
- Differentiate their total rewards package while controlling costs
- Attract, retain, or develop their talent
- Offer highly specialized, industry-specific wellness perks
- Incentivize their employees to take a proactive approach to their wellbeing
- Complement their traditional group benefits plan or HSA
- Control how their employees spend their after-tax dollars
3. FSA (Flexible Spending Account)
An FSA, or Flexible Spending Account, is a cafeteria-style mix of both taxable and tax-free health and wellness benefits.
If you’ve been researching spending accounts for your employees, there’s a good chance you’ve read about FSAs. Keep in mind there is an important distinction between how FSAs are structured in the U.S. versus Canada.
In the United States, an FSA is a type of savings account that can be set up by either an employer or an employee. The account allows employees to set aside a limited portion of their pay check and to use these ‘pre-tax dollars’ to pay for eligible health care expenses.
In Canada, Flexible Spending Accounts can only be funded by an employer. The main advantage of an FSA is that it combines eligible expenses from both HSAs (tax-free) and WSAs (taxable) to provide the most flexibility for employees.
FSAs combine eligible expenses from both HSAs (tax-free) and WSAs (taxable) to provide the most flexibility for employees.
How do FSAs work?
With an FSA, employers create a ‘menu’ of taxable and non-taxable benefits they’d like to offer their employees. They then provide each employee with a fixed amount of credits. At the beginning of the year, employees allocate their desired amount of credits towards the benefits they value most. They can then spend those credits throughout the year.
Note that once employees have allocated their credits, they cannot make changes until the following year.
For example, a young, single employee with 4,000 credits (equal to $4,000) at the beginning of the year can allocate $1000 to WSA ‘taxable’ claims such as a gym membership and nutritionist, and $3000 to HSA ‘tax-free’ claims, such as a massage therapist or dental care. Meanwhile, an employee at the same company with a young child and coverage through their spouse could choose to allocate their entire $4,000 towards day care services through their WSA only.
What is covered with an FSA?
An FSA can include all of the items under the HSA eligible expenses list plus any WSA expenses chosen by the employer.
Key advantages of FSA:
FSAs are ideal for small and medium businesses who want to:
- Offer truly flexible benefits plans to their employees, particularly those with diverse employee demographics
- Show commitment to their employees’ unique health and wellbeing needs
- Take advantage of tax benefits while also offering more tailored wellness perks
So, HSA, FSA or WSA? 3 Questions to Ask
You can offer traditional group benefits, a HSA, FSA, or WSA, or some combination of them all. Either way, you’ll be taking an important step towards healthier and more engaged employees.
If you’re still unsure, here are three questions to help guide your decision:
- What are your business objectives? Hint: WSAs or FSAs may be more attractive for recruiting purposes.
- What are your employees’ unique needs? For example, do many of your employees have children or elderly relatives to care for?
- What is your benefits budget? All spending accounts are cost-controlled, but only Health Spending Accounts are 100% deductible as a business expense.
You can do it
Spending accounts offer a meaningful and cost-effective way to foster health, wellbeing, and productivity. They can be an alternative or supplement to traditional benefits for greater flexibility within the maximum cost you determine in advance.
An HSA makes your investment more valuable to each employee, while a WSA is a powerful employee incentive. Both show you care to attract and retain happy and health employes. A broker can help you decide what’s best for your unique organization.
Last updated: August 22, 2018