When it comes to Health Spending Accounts (HSAs) or Private Health Services Plans (PHSPs), you may wonder why employees need to be enrolled in a specific plan rather than selecting their coverage independently. The answer lies in the foundational principles of how PHSPs are structured, particularly according to the guidelines set by the Canada Revenue Agency (CRA).
The Nature of Insurance that must exist in an HSA
Under the CRA’s rules, specifically outlined in Interpretation Bulletin IT-339R2, an HSA must operate in the nature of insurance. This means it must adhere to several key principles of insurance, including:
An undertaking by one person: The plan sponsor (usually the employer) undertakes the responsibility to provide coverage.
To indemnify another person: The employee is protected from specific medical expenses.
For an agreed consideration: The agreement is decided ahead of time and is adhered to by the employer.
From a loss or liability in respect of an event: Medical expenses are the "event" for which protection is provided.
The occurrence of which is uncertain: You can’t predict medical expenses with certainty, which is a defining characteristic of insurance.
This insurance framework requires that employees be grouped into defined plans, just as with traditional insurance policies.
Why Groupings Matter: Preventing Anti-Selection
One critical reason for assigning employees to specific plans is to prevent anti-selection—a situation where individuals select coverage only when they anticipate needing it. By enrolling employees into pre-defined plans based on objective criteria such as job title, salary, or seniority, the employer ensures fairness and balance. This grouping is essential for the HSA to function as an insurance-like product and remain compliant with CRA regulations.
Maintaining Compliance with CRA Guidelines
In line with CRA requirements, HSAs must follow these guidelines to qualify for tax benefits.
Enrolling employees into specific plans based on objective criteria ensures the integrity of the Health Spending Account. This approach prevents anti-selection, supports fairness across the board, and ensures compliance with CRA regulations.
For more details on the requirements of a PHSP, you can refer to the full CRA bulletin under IT-339R2.