The CRA guidelines for HSAs indicate that an HSA must act like a plan of insurance—and like insurance, there must exist an "Element of Risk."
So you know how you can't buy insurance after your house catches fire, or you can't buy health insurance after you've been diagnosed with an illness? The same concept applies to an HSA.
Here’s where the "Element of Risk" really has to be taken into consideration:
Mid-Year Changes
HSAs have rules about changing plan amounts in the middle of the year. This is because an HSA is based on predictions for the year's health needs. Changing it midway could raise red flags with the CRA. For this reason, generally, we recommend any plan limit changes be done at renewal.
There are circumstances where a plan increase can be mid-year, but there are a few things to keep in mind:
Balance cannot be increased for just one employee—it must be increased for all employees in the class
If you are increasing the balance because an employee has incurred expenses greater than the plan limit set, it could be seen as offside with the CRA to increase the limit mid-year
In any situation, we always recommend you get the sign-off of the corporate accountant
Reallocating Funds
The CRA has set rules on when you can reallocate your funds, because that "Element of Risk" has to exist on a myFlexplan as well. You can't move funds between HSA and WSA freely, because you might have an event occur that you didn’t plan for—and reallocating the funds to accommodate that removes the "Element of Risk."
Backdating Plans
You can't set up an HSA and backdate it to be effective prior to an event occurring. That would eliminate the "Element of Risk" that comes with having insurance—or an HSA in this case—to protect against future expenses. There are some situations where backdating is possible, and [we’ve attached a guide that goes over that here].
Additional CRA Guidance on Risk and Tax Treatment
HSAs and Flexible Spending Accounts are not traditional insurance, but the CRA still treats them as Private Health Services Plans (PHSPs), which must contain an element of risk to qualify for tax-preferred treatment.
While employees may be entitled to claim up to a certain amount per year through the HSA, the CRA requires that:
The allocation of funds must be made before claims are incurred and known
There must be an element of risk (the possibility that claims might not reach the full allocation)
The plan must qualify as a PHSP to receive tax-free treatment for health-related claims
Without this risk element, the CRA may view the arrangement as simply additional taxable compensation rather than a legitimate PHSP. This is why myHSA provides a set allocation window, with reminders to the employees—it’s very important to make this distinction at the beginning of the benefit year. Should a Plan Administrator wish to make an exception to an allocation, they are accepting the risk that the CRA may determine the risk was eliminated by the change.