Group benefits, or a health spending account?

Explainer, Ontario incorporated businesses

Two very different machines can sit underneath the words "employee benefits." A traditional group benefits plan is insurance: pooled premiums, coverage whether or not anyone claims, and costs that renew with the group's claims history. A health spending account is a reimbursement arrangement: the corporation sets a fixed amount per person, employees claim eligible health expenses against it, and the corporation's cost is the amount it chose, plus administration. Neither is the right answer for every business. Here is how to think about each.

Question	Traditional group benefits	Health spending account (HSA)
What it is	An insured group plan: health, dental, and often life and disability coverage, underwritten by an insurer for the whole group.	A Private Health Services Plan (PHSP) arrangement: the corporation reimburses eligible medical expenses up to a set amount per employee per year.
Cost shape	Premiums renew annually and move with claims, demographics and insurer pricing. A heavy claims year can mean a sharp increase.	The corporation chooses the amounts. Cost is claims actually made, plus an administration fee, so the ceiling is known in advance.
What it covers	A defined schedule: drug formularies, dental fee guides, paramedical maximums, and categories the plan was built with.	Any expense on the Canada Revenue Agency's eligible medical expenses list for the medical expense tax credit: a wide list, from dental work to orthodontics to many therapies, with no formulary.
Tax treatment	Premiums for health and dental are a deductible business expense, and the benefit is generally received tax free by employees outside Quebec.	Reimbursements and administration fees are a deductible business expense when the arrangement qualifies as a PHSP, and the reimbursement is generally received tax free by employees outside Quebec.
Who it suits	Businesses that want predictable coverage for a team, insured protection against large claims, and the recruiting signal of a real plan.	Small incorporated businesses and owner operators who want cost control and flexibility, and teams that use benefits unevenly.
What it does not do	Less flexibility: the plan schedule decides what counts, and unused categories still cost premium.	No insurance against catastrophe: an HSA does not include life, disability, or travel coverage, and it stops at the amount the corporation set.

The PHSP facts, plainly

A health spending account only gets its tax treatment if it is genuinely a Private Health Services Plan, which is a defined term in the Income Tax Act (section 248(1)). In plain language, the Canada Revenue Agency expects the arrangement to have the character of insurance: a real plan, with defined eligible expenses, defined limits per person or class, and an obligation on the corporation to reimburse claims made under it. An arrangement that is simply "send us your receipts and we will pay whatever" risks being treated as salary instead, which is taxable to the employee and a different conversation entirely.

Eligible expenses follow the same list used for the medical expense tax credit. Classes can be set by employee group, for example owners and staff at different amounts, but the classes and limits need to be set in advance and applied consistently. Unincorporated sole proprietors face additional limits on what they can claim through a PHSP for themselves; incorporated businesses are where the structure is most straightforward. Administration is usually handled by a third party provider for a percentage fee on claims.