When setting up a myHSA (Health Spending Account) or myFlexplan Account, employers must adhere to specific guidelines to ensure fairness, compliance, and tax efficiency. A key aspect of this setup involves classing employees based on logical and objective criteria rather than subjective or preferential factors. This approach aligns with regulations set by the Canada Revenue Agency (CRA) and industry best practices outlined by the Canadian Life and Health Insurance Association (CLHIA).
1. Acting Like a Plan of Insurance
Health Spending Accounts must be structured to resemble a plan of insurance to remain compliant with the Income Tax Act and be eligible for the Medical Expense Tax Credit (METC). According to CRA guidelines, HSAs are considered a private health services plan (PHSP) only if they meet certain conditions, such as:
Covering only eligible medical expenses as defined by the CRA.
Having an element of risk-sharing.
Applying consistent and reasonable criteria for employee classifications.
Employers cannot arbitrarily allocate different benefit amounts to individual employees without valid, business-related justifications. Instead, employee classing should be based on logical groupings such as:
Job Role: (e.g., Executive, Management, Support Staff)
Employment Status: (e.g., Full-time, Part-time, Contract)
Seniority/Tenure: (e.g., Years of Service)
Family Needs: Family vs Single vs Couple
2. Avoiding Favouritism and Ensuring Fairness
Classing employees based on fair and consistent criteria helps prevent perceptions of favouritism or discrimination within the workplace. Arbitrary differences in benefit allocations could lead to employee dissatisfaction, decreased morale, and potential legal challenges. To maintain a fair workplace culture, employers should establish clear, objective classing policies that:
Apply equally to all employees within a class.
Have a documented rationale that aligns with business objectives.
Are transparent and easily communicated to employees.
3. Compliance with CRA and CLHIA Guidelines
CRA regulations require that all spending account plans meet eligibility criteria to retain their tax-free status. Failure to apply logical classifications may result in the plan being considered a taxable employee benefit rather than a PHSP, leading to unintended tax liabilities for both employers and employees.
CLHIA further recommends that employers:
Maintain consistency with other insurance-related benefits.
Avoid any practices that could be perceived as arbitrary or discriminatory.
Regularly review classifications to ensure they reflect current organizational structures and industry standards.
4. Business Justifications for Employee Classing
Employers should be prepared to justify their classing structure in the event of a CRA audit. Acceptable business justifications include:
Different compensation packages due to job demands.
Varying healthcare needs based on employment types (e.g., field vs. office roles).
Competitive benefits offerings aligned with industry benchmarks.
5. Steps to Implement Logical Employee Classing
To ensure compliance and fairness, employers should take the following steps when classifying employees in a spending account plan:
Define Clear Criteria: Establish objective categories based on job-related factors.
Document Policies: Maintain written records outlining the rationale for each class.
Communicate Transparently: Inform employees about their classification and the reasoning behind it.
Review Periodically: Regularly reassess employee classifications to align with company changes and regulatory updates.
Employers must class employees in their spending account plans based on logical and objective criteria to comply with CRA and CLHIA guidelines, avoid favouritism, and ensure the plan retains its tax-free status.
Questions? Reach out to support@getmyhsa.com