Advisors and business owners often ask why employees can’t make their own contributions to a Health Spending Account (HSA), either through payroll deductions or direct top-ups. While it may seem like a flexible feature, the reality is that employee-paid contributions can trigger tax consequences—and risk non-compliance with CRA regulations.
💸 Payroll Deductions Are Taxable
If an employee elects to have part of their salary redirected into an HSA, that income is still fully taxable. The CRA views the entire salary as income—regardless of how it is allocated. That means employees pay tax on money they never actually receive in-hand. This undermines the key value of an HSA: tax-free reimbursements funded by the employer.
❗ METC Isn’t a Full Alternative
Employees might consider paying out-of-pocket and claiming the Medical Expense Tax Credit (METC) instead. While that’s an available option, it’s not equivalent. The METC offers only a partial credit, and it applies only after exceeding a minimum expense threshold. In many cases, employees receive little to no benefit compared to the full reimbursement of a properly structured HSA.
⚠️ Unused Funds Can’t Be Refunded
CRA rules don’t allow for a refund of unused HSA balances if those funds were contributed by the employee. So if the full amount isn’t used by year-end, it’s simply forfeited—taxed when it was earned and lost if not spent.
✅ Employer-Funded HSAs Are CRA-Compliant
To be classified as a Private Health Services Plan (PHSP), and to maintain its tax-free treatment, an HSA must be 100% employer-funded. Allowing employee contributions undermines the plan’s structure and puts the entire benefit at risk of reassessment by the CRA.
Protect Your Team—and Your Plan
At PC Metro, we design every plan to stay within CRA guidelines while maximizing value. Our HSA platform is built exclusively around employer-funded models to ensure full tax efficiency, audit-proof records, and peace of mind for both business owners and employees.
If your clients are seeking flexible benefit options, let’s explore compliant alternatives—like a Wellness Spending Account—that can still provide employee choice without compromising tax status.
