You can enjoy the tax benefits of Health Spending Accounts for both incorporated businesses and unincorporated (partnership and sole proprietors) businesses.
Incorporated businesses qualify for Health Spending Accounts. Typically, the business administrator will define employee classes (group of employees) based on roles, responsibility, or compensation. Each class will receive a spending limit.
Below is an example of a small business setup with three classes.
|Class name||Annual limit|
During setup, the company administrator has great flexibility in designing the Health Spending Accounts. However, to ensure that your plan meets all CRA requirements, the following guidelines should be taken into consideration:
- Offer Health Spending Accounts to individuals solely based on their capacity as employees of the corporation.
- Shareholders and non-shareholder employees must receive benefits comparable to their total compensation as employees (not as shareholders).
- Create employee classes based on equivalent responsibilities.
- Set reasonable Health Spending Accounts limits. Generally accepted:
- Annual limit should not exceed 15% of average employee annual earnings in their Class
- Highest class limit should not exceed the lowest class limit by a factor of 10. For example, if the Staff limit is $1,500, then the Executive class limit should not exceed $15,000 (= $1,500 * 10)
Unincorporated Businesses (Sole proprietors, Partnerships)
Sole proprietors and partnerships also qualify for Health Spending Accounts. under the following eligibility criteria.
1. Self-employed individuals must be actively engaged in the business on a regular and continuous basis, and
2. In the current or preceding tax year, excluding deductions for medical expenses, more that 50% of the individual’s total income is from the unincorporated business, or
the individual’s income from sources other that the business does not exceed $10,000
Maximum Health Spending Account limit:
Case 1: Self-employed individual without employees, or
Case 2: Self-employed individual with one or more employees where fewer than 50% are arm’s-length employees
- $1,500 for each of the individual proprietor, spouse and dependents age 18 or more and
- $750 for each dependent under 18.
For example, a sole proprietor with a spouse and 2 children under the age of 18 will be allowed a maximum of $4,500 per calendar year.
Case 3: Self-employed individual with one or more employees where 50% or more are arm’s-length employees:
- Employee limit should not exceed 15% of average employee earnings in the class.
- Self-employed individual should not exceed the amount allocated to the class with the lowest limit.
For example, a business with five employees: the sole proprietor and four arm’s length individuals. If one employee has a $3,000 limit and three employees have a $2,000 limit, the sole proprietor will be able to claim no more than $2,000 (the lowest limit).
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