Is Health Saving Account a better alternative to Health Insurance?

Health Saving Account (HSA) is a tax-favored medical savings account, which is generally offered with a high-deductible health insurance plan. HSA offers cost-effective and tax reduction solutions for employers and self-employed individuals, to pay for healthcare benefits not covered by the Ontario Health Insurance Plan (OHIP) or a group health plan. An HSA is “an exclusively designed saving account” created especially for healthcare spending and is designed to comply with Canada Revenue Agency (CRA) guidelines of Income Tax Act 339 and 85 R2. The contributions or deposits are not taxed. Setting up an HSA allows the funding of health expenditures by using pre-tax dollars.

This would reduce the cost by 30%- 40% per year for medical and health-related services, which is far superior to savings you would receive from a medical tax credit.

Health savings account funds are utilized to pay for the eligible, routine medical expenses, such as doctor visits, tests, paramedical services, and medical equipment’s whereas traditional health Insurance protects major unforeseen catastrophic risks such as illness or accident.

Health Savings Plan provides large health benefits too:

  • Self-Employed
  • An independent contractor
  • A licensed professional, or
  • A small to the medium-sized business owner

Features of Health Savings

  • There are no fees for establishing an account.
  • The contributions are treated as a 100% business deduction in the year in which they are contributed for the business and the employee receives a non-taxable benefit.
  • You can choose your own level of premium and there is no fixed premium limit and no sub-limits on any type of expense.
  • Unused contributions are not forfeited and they carry forward for spending the following year.
  • HSA does not have underwriting; anyone with a pre-existing condition can apply for this benefit provided, they meet the age of entry and other requirements.
  • Traditional Health Insurance generally does not cover 100% of your expenses. Some expenses have limits or the employee must pay a percentage, e.g. 20% of drugs and 50- 70% of major dental; other types of expenses may simply not be covered at all. Also, in many group plans, a share of the premiums must be paid by the employee through payroll deduction.

Section 118.2 (2) of the Income Tax Act (Canada), defines a wide range of eligible health costs. These are summarized on the back of this sheet and also outlined in CRA’s Website.

A Health savings account is usually set up with a third party administrator (TPA). The TPA allows a pre-set amount of health funding each year depends on your needs. They act as a trustee to supervise on your behalf and approve when the claims are submitted. They serve as an intermediary between CRA and the plan holder. Each plan member can spend their medical expenses within the assigned limit. If health care costs exceed the pre-determined amount, you have the flexibility to add extra funding on a pre-tax basis.

On average pay, most of the TPA’s generally charge administration fees up to 10% and in addition to 2% of the actual bills to be paid as Ontario premium tax.

Insurance can provide risk protection, but it doesn’t reduce overall costs. The best way to lower costs is to pay all expenses with pre-tax dollars rather than after-tax dollars.

I strongly advocate the Health saving plan for self-employed and business owners. You can request a free quote for a health saving plan.