Can you buy critical illness insurance after you’ve been diagnosed with an illness?
Can you buy home insurance after a house fire?
Can you set up an HSA after you’ve incurred an expense?
When put like that… it’s obvious. They’re all plans of insurance, and they all need to be in place prior to your claim.
So, what is backdating?
Backdating in the context of an HSA, means that you assign a start date to the plan that is earlier than the actual creation date. For example – you decide in March to move forward with an HSA, but want the plan to include the entire calendar year, you would need to backdate the start date to January 1. This would allow for expenses incurred prior to March to be accepted through the HSA. Why is this a problem? Given there are tax advantages to the health spending account, the CRA has rules about how it must be set up and the integral components that must be present. One of the most crucial components is the ‘element of risk’, this is present when the plan is put in place, a limit is established, all before claims are known or incurred.
When we backdate, and past claims are included, it could be said that the limit was adjusted to accommodate the expenses, and/or the plan was only implemented to avoid personal tax and put it through the business. Not to mention, these instances usually come up when the plan is being implemented for a claim incurred by a Shareholder-employee, who also happens to be in control of the benefit limits.
As Shareholders would be the most scrutinized participants in the HSA, we need to make sure the rules are followed (see Shareholder Guidelines) and that the limit is established based on the recommendations, not their claims. When it comes to companies with employees, and a request to backdate, generally the intent is a bit different – more often than not it’s to align dates as the account is being transferred, or to align with the insured plan, fiscal year, etc. Given it’s no longer a question of anti-selection with these reasons in mind, it would not be as consequential to backdate the plan.
What is the best practice?
Our recommendation is to use a current or future start date for new spending accounts. This will establish the necessary risk and avoid raising red flags.