Overview
A Private Health Services Plan (PHSP) is a benefit plan that allows a Plan Sponsor company to reimburse eligible medical and dental expenses for Plan Members (employees and their dependants).
A Health Spending Account (HSA) is a type of PHSP.
PHSPs are governed by the Canada Revenue Agency (CRA) and come with valuable tax advantages:
- Reimbursements to Plan Members are completely tax-free
- The Plan Sponsor company can treat those reimbursements as a deductible business expense
This makes PHSPs a popular vehicle for offering flexible health benefits, especially when structured through HSAs.
The details
Why does an HSA need to operate in the nature of insurance?
To qualify as a PHSP, and retain its tax advantages, an HSA must operate in the nature of insurance, as required by the CRA.
This means the Plan must look and behave like insurance, with risk, unpredictability, clear limits, and adjudication in place.
Risk
- Not all Plan Members will necessarily make claims. There’s no guarantee of receiving money unless an eligible expense is incurred.
- If the funds in an HSA are used up during the benefit period, Members are out-of-pocket for further medical expenses.
Unpredictability
- Reimbursement is not automatic. It depends on whether an eligible medical expense arises.
- Contributions must be set at the start of the benefit period and cannot be topped up mid-year (except in the case of a qualifying life event).
Limits and rules
- Eligible expenses only: Reimbursements are limited to CRA-eligible medical expenses.
- Annual limits: There must be a defined annual maximum per Plan Member (e.g., $2,000/year).
- No cash value: Unused funds can’t be paid out as bonuses or personal income.
- One carry-forward rule: Either contributions or expenses may carry forward but not both.
- Benefit period rules: Current-year contributions can’t reimburse prior-year expenses (except in permitted carry-forward scenarios).
Administered like insurance
An adjudicator, like Blendable, reviews all claims to confirm they meet CRA eligibility guidelines, just like a traditional insurance provider.
Meeting the requirements
If a Plan no longer meets the above listed requirements, it may no longer qualify as a PHSP. That puts the Plan’s tax-advantaged status at risk, including:
- Reimbursements becoming taxable income for Members
- Plan Sponsor companies losing the business deduction
A note about HSA Rollover Plans
HSA Rollover Plans combine 2 different features, a Rollback and an RRSP packaged into a feature. Unused funds from the HSA are not being used to fund the RRSP:
- They are returned to the Plan Sponsor company (as a credit to the Rollback)
- With the contribution report, the Plan Sponsor company recognizes those funds as Member income and does the necessary payroll source deductions on the income
- The company makes an RRSP contribution for the Member - facilitated by Blendable.
Anything else?
Following the “nature of insurance” rules is what keeps HSA reimbursements tax-free for Members and deductible for companies.
Plan sponsors should be clear about carry-forward rules and annual contribution limits in their Plan design. Members should know that if funds aren’t used in time (depending on plan rules), they can expire.