Current as of October 2026. Government programs, tax rules and prices change. Check the official sources listed at the end of this page before making a decision, and confirm details with a licensed advisor.
The short answer
A health spending account (HSA), sometimes called a health care spending account, is an employer-funded allowance that employees can use for eligible health and dental expenses. At the start of each plan year, the employer sets aside a fixed number of credits for each eligible employee. When an employee has an eligible expense, such as a dental bill, prescription glasses or a physiotherapy visit that their other coverage does not fully pay, they submit a claim and are reimbursed from their credits.
Unlike traditional insured benefits, there is no premium pool that rises and falls with group claims. The employer pays for the credits that are actually used, plus administration fees and applicable taxes. Desjardins, for example, describes the total cost of its HSA as unable to exceed the credits allocated plus administration fees and applicable taxes. For a side-by-side look at the two approaches, see health spending account vs. group insurance.
How a health spending account works, step by step
The mechanics are simple once you see them laid out. Details vary by provider and plan, so treat this as the general shape rather than the rules of any specific contract.
- The employer chooses an amount. The business decides how many credits each employee (or each class of employee) receives per plan year.
- Credits are deposited. The provider loads the credits into each employee's account at the start of the plan year.
- The employee has an eligible expense. For example, a dental cleaning, a prescription, new glasses or a massage therapy visit with a recommendation where the plan requires one.
- The claim is submitted. With some providers, registered health professionals can submit eligible expenses directly; otherwise the employee sends receipts through a website, app or by mail.
- The claim is paid from credits. The employee is reimbursed up to their remaining balance, and the employer is billed for the claim plus fees and applicable taxes.
What a health spending account can pay for
In Canada, HSAs are generally tied to the list of medical expenses eligible for the federal medical expense tax credit (METC). As of October 2026, the Canada Revenue Agency's list of eligible medical expenses includes items such as dental services, prescription drugs, eyeglasses and contact lenses, hearing aids and laser eye surgery, among many others. The same list shows that over-the-counter medications, vitamins and supplements, gym fees and cosmetic procedures such as teeth whitening are not eligible.
This is why HSAs work well for the everyday gaps people notice: the portion of a dental bill the main plan did not cover, a second pair of glasses, or physiotherapy visits after a basic plan maximum is used up. Desjardins, for example, states that products and services must be eligible for the METC, not fully covered by a private or government plan, and prescribed by a health professional where required. For a deeper list, read what a health spending account can cover. If your team wants to fund fitness or lifestyle costs too, that is usually a separate taxable account, covered in HSA vs. wellness spending account.
How tax works on an HSA (as of October 2026)
Tax treatment is one of the main reasons employers choose an HSA, but it depends on the plan being set up properly. As of October 2026, the CRA states that medical expenses paid under a private health services plan (PHSP) are not a taxable benefit to the employee. For a self-insured health care spending account, the CRA's condition is that all or substantially all of the benefits paid to all employees that year are for medical expenses eligible for the METC. The CRA also expects the plan to cover only the employee, their spouse or common-law partner, or household members connected to the employee by blood, marriage or adoption.
If a benefit does not qualify, the CRA treats it as taxable employment income that must be reported on the employee's T4 slip, with income tax and CPP contributions withheld (and EI as well if the benefit is paid in cash). Quebec is a notable exception for provincial tax: Desjardins notes that expenses paid through an HSA are subject to Quebec provincial income tax, though not federal income tax. Tax rules can change, so confirm current treatment with an accountant or a licensed advisor. The guides on employee benefits taxation and health spending account tax savings go further.
What happens to unused credits
Each plan sets out what happens at the end of the year. Desjardins, for example, describes three common designs, and other providers offer similar choices. Which one you pick affects both employee goodwill and your annual cost.
- Credit carry-forward: unused credits roll into the next year, then are forfeited if still unused at the end of that second year.
- Expense carry-forward: unpaid claims from the prior year can be paid with the new year's credits, but leftover credits are lost.
- No carry-forward: unused credits expire at the end of each plan year.
Who an HSA tends to suit
An HSA can suit small businesses that want predictable spending, owner-operated companies, and employers who want to top up an existing plan. A business with only a few people may use an HSA on its own, while a larger employer might pair it with an insured extended health plan so that big or unexpected costs stay insured and the HSA fills in the gaps. Owners with incorporated businesses often ask whether they can be covered as well; the answer depends on how the plan is structured and on the employment relationship, so get advice before assuming.
For employees, the appeal is choice. One person might spend their credits on orthodontics for a child, another on prescription glasses, another on physiotherapy after a weekend sports injury. Learn more about plan options on the health spending accounts page.
Questions to ask before setting one up
A licensed benefits advisor can walk you through providers and plan designs, but it helps to arrive with your own questions. Ask about the administration fee and how it is calculated, which taxes apply in your province, how claims are submitted and how quickly they are paid, whether direct billing is available with dentists and pharmacies, which carry-forward option is offered, and how the HSA would coordinate with any existing group coverage.
When you are ready, get matched with a licensed benefits advisor who can explain the options available to a business of your size.
Common questions
Is a health spending account the same as health insurance?
Not exactly. An HSA reimburses eligible expenses up to a fixed credit amount set by the employer, while insured benefits pool risk and pay claims up to the plan's limits in exchange for premiums. Many employers use both together.
Are HSA reimbursements taxable to employees?
As of October 2026, the CRA states that medical expenses paid under a private health services plan are not a taxable benefit, provided the plan meets the CRA's conditions. Desjardins notes that HSA payments are subject to Quebec provincial income tax. Check current rules with an accountant.
Can I claim expenses for my spouse and children?
Generally yes. The CRA expects a PHSP to cover only the employee, their spouse or common-law partner, or household members related by blood, marriage or adoption, and providers such as Desjardins allow claims for eligible dependants. Your plan documents set out exactly who is covered.
Can I also claim an HSA-reimbursed expense on my tax return?
No. The CRA states that you can only claim the part of a medical expense that has not been, and will not be, reimbursed. If your HSA paid it, that portion cannot also be claimed as a medical expense.
Sources and further reading
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