Is your Business Eligible to Use Healthcare Spending Accounts?

January 31, 2022 | Posted by: Roar Solutions

Is your Business Eligible to Use Healthcare Spending Accounts?

We get asked all of the time about group benefits for individuals that own a business where they are the only employee. These are difficult because in most cases to participate in a traditional benefits plan you need to have at least 3 plan members. There are a few options in the marketplace for companies with only one employee but there are limitations to many of these. What options are left for you? If you own a business that is incorporated and T4 yourself for income tax purposes as an employee of that company then you should really consider setting up a Healthcare Spending Account (HSA) for yourself.

We went into the nuts and bolts of HSA’s in a previous post. If it is something that you want to explore further there is a step that you need to take before proceeding. You need to figure out if your business is eligible to set up one of these accounts. If the HSA is not set up properly at the start they may be looked at as a shareholder benefit and the tax advantages disappear. So let’s look at what you need to do to ensure that this doesn't happen.

You need to be an incorporated business and be drawing T4 income from it. If you are only drawing dividends from the company then you may need to get a letter from your accountant that details that you are an employee even though there is no T4 income. If you aren’t incorporated this is a non-starter. Unincorporated businesses aren’t eligible to have HSA’s.

Now you need to make sure that the limit that you set for spending on eligible expenses every year needs is deemed to be reasonable. Currently the upper limit of what is considered reasonable is 10-15% of the income that someone who has a similar employee would have. This means that if you pay yourself $200,000 at your company, but if you worked elsewhere you would only get $100,000 the limit for reasonableness is based on the $100,000 income.

Now there are a few questions. They are yes/no based and you need to be able to answer yes to them. The first question is if the plan is similar to what other businesses offer equivalent employees. Secondly, can all of your employees participate in the plan? Finally, if there are employees not related to the shareholders are they able to participate at similar levels (think a chiropractic office where the Chiropractors that own the business need to offer the same benefit to other Chiropractors who aren’t owners)?

Answer these questions with three ‘Yes’ responses and you are able to set up an HSA for your business.

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