A Personal Spending Account (PSA) is an employee benefit that gives more flexibility beyond traditional health plans. A PSA lets employees pay for a wide range of health, wellness and lifestyle expenses using pre-tax dollars from their employer.

PSAs are gaining popularity as they promote well-being while keeping costs predictable for employers. In today’s job market, offering a PSA can help recruit and retain top talent.

This guide covers everything about Personal Spending Accounts:

• What is a PSA?
• How does a PSA work?
• What expenses can a PSA cover?
• The types of PSAs
• The benefits of offering a PSA
• PSA eligibility, regulations, and best practices
• And more!

Read on whether you are an employer considering a PSA or an employee who wants to understand this benefit.

What is a Personal Spending Account?

A Personal Spending Account (PSA) is an employer-provided benefit that allocates a set amount of pre-tax dollars for employees to use on a range of eligible health, wellness and lifestyle expenses.

With a PSA, the employer deposits a pre-determined allowance into an account for each participating employee. The employee can then use these funds to pay for health, fitness, personal development, and other approved expenses not covered under traditional insurance plans. Employees who incur a qualified expense file a claim and get reimbursed from their PSA up to the available balance.

PSAs are also known as:

• Flexible Spending Accounts (FSA)
• Wellness Spending Accounts (WSA)
• Health Care Spending Accounts (HCSA)
• Medical Spending Accounts (MSA)
• Health Savings Accounts (HSA)
• Personal Reimbursement Accounts

The key feature of all these accounts is that they provide expanded options beyond a regular health insurance plan. Employees receive a set amount of funds each year according to their priorities and circumstances.

This gives employees more freedom and flexibility while also allowing employers to limit costs by capping contributions. Offering a PSA demonstrates an employer’s commitment to comprehensively supporting overall wellbeing.

How Does a Personal Spending Account Work in Canada?

Setting up and using a Personal Spending Account involves a few simple steps:

1. The employer decides on an allowance amount to provide for each employee. Common options are:

• Flat dollar amount (e.g. $500 per year)
• Percentage of salary (e.g. 1% of base pay)
• Based on employee classification (e.g. $400 for full-time, $200 for part-time)

2. At the beginning of each plan year, the employer deposits the PSA allowance into individual employee accounts.

3. Employees pay for eligible products and services as needed throughout the year.

4. Employees submit documentation of qualified expenses to the PSA administrator to get reimbursed.

5. The administrator verifies the expenses meet the requirements of the plan.

6. If approved, the employee is reimbursed up to the amount available from their PSA account.

Most PSAs are based on the calendar year, with new funds allocated annually. However, employers can also opt to provide funds monthly or quarterly.

Any unused balance at the plan year’s end can sometimes be rolled over to the following year. However, rollover rules and limits vary. Some PSAs require employees to “use it or lose it” within the annual period.

The essential advantage of a PSA is that employees receive new funds each year. So even if the total balance isn’t used, they get a “refill” and can continue submitting claims against the newly allocated amount.

What Expenses are Covered by a Personal Spending Account?

One of the top benefits of a Personal Spending Account is the wide range of expenses that can be covered. Employers have extensive flexibility in defining what their PSA will reimburse. There is no universal list of eligible expenses.

Common categories covered by a PSA include:

Health and Wellness

• Alternative therapies (acupuncture, naturopathy, homeopathy)
• Massage therapy
• Weight management programs
• Smoking cessation programs
• Nutrition counseling
• Health assessments
• Disease management programs
• Fertility treatment
• Eldercare
• Stress management

Fitness and Sports

• Gym and fitness club memberships
• Personal training fees
• Fitness equipment and wearable devices
• Exercise classes
• League and tournament fees
• Sports gear and equipment
• Entry fees for sporting events

Healthy Living

• Weight management programs
• Nutrition counseling
• Stress management programs
• Smoking cessation programs
• Apps for meditation, sleep, etc.

Education and Development

• Courses, seminars, conferences
• Professional accreditation fees
• College tuition
• Textbooks
• E-learning subscriptions
• Student loan payments

Work-Life Balance

• Childcare
• Eldercare
• Identity theft protection
• Legal services
• Home security systems

Other Common Expenses

• Eyeglasses, contacts, vision care
• Alternative health insurance premiums
• Professional association dues
• Financial planning services
• Pet insurance premiums

Employers should communicate the full range of covered expenses in detail to optimize employee satisfaction and utilization when introducing the PSA. Keeping employees informed on usage guidelines is also crucial.

Types of Personal Spending Accounts

There are a few different classifications of Personal Spending Accounts to be aware of:

Tax Treatment – Taxable vs. Non-Taxable

The most basic distinction is whether the PSA is structured as a taxable or non-taxable benefit. This impacts how claims get reimbursed:

Taxable PSA – The allowance and any reimbursements are taxable on the employee’s paycheck and T4/tax return. Employees get reimbursed for the total amount claimed.

Non-taxable PSA – Reimbursements are not taxed. However, employees only get reimbursed the amount minus tax withholding. The withheld tax goes to CRA on the employee’s behalf.

Both options have pros and cons. Non-taxable PSAs provide greater purchasing power on claims. However, taxable PSAs give employees access to more total dollars over the year.

Employers should consult accounting and tax professionals when deciding on the optimal structure.

Funding – Employer, Employee or Both

PSAs can be funded in full by the employer or involve contributions from both parties:

• Employer-funded – The employer provides the total PSA allowance amount. This is the most common approach.
• Employee/employer shared funding – Both parties contribute to the account. For instance, employers might match employee PSA contributions up to a set maximum.
• Employee-funded – Employees can allocate their pre-tax dollars to a PSA through a flexible spending account. Employers facilitate payroll deduction but do not provide funds directly.

Allowing employees to contribute gives them more control. But employer-only funding keeps things simple. Most employers absorb the total cost of PSA contributions.

Standalone vs. Part of a Cafeteria Plan

Employers can offer a Personal Spending Account as:

• A standalone benefit – The PSA is the only spending account provided.
• Part of a cafeteria plan – Employees are allocated credits between a PSA and Health Spending Account according to their needs.

Cafeteria plans allow employees to customize multiple accounts. However, standalone PSAs are easier to understand and manage. Either approach can work well.

The Benefits of Offering a Personal Spending Account

Adding a Personal Spending Account to your benefits package provides employee and employer advantages.

Benefits for Employees

• Covers more options – Funds are available for more health, wellness, and lifestyle expenses than insurance.
• Increased flexibility – Employees can choose how to spend their PSA dollars each year according to personal priorities.
• Added tax savings – PSA contributions and reimbursements provide tax advantages.
• Supports overall well-being – Provides resources to manage health and life needs holistically.
• There is no pressure to spend all at once – Funds can be used gradually over the year.
• Simple documentation – Usually needs invoices/receipts, with minimal paperwork.
• Portable – Employees can take an unused PSA balance with them if they leave the company.
• Added compensation – PSAs augment the total rewards package.

Benefits for Employers

• Enhanced benefits – Round out your benefits offering with a few administrative requirements.
• Support recruitment and retention – PSAs give you a competitive edge in attracting and keeping top talent.
• Controllable costs – Outlays are limited to fixed PSA allowance amounts.
• Streamlined management –Easy to set up and integrate with other benefits.
• Promotes wellness and engagement – Employees use funds to support health and personal growth.
• Flexible setup – Wide latitude to define covered expenses and eligibility terms.
• Low administration – Employees manage expenses directly after funds are allocated.
• Tax efficiencies – PSA contributions and reimbursements receive preferential tax treatment.

Who is Eligible for a Personal Spending Account?

Employers define eligibility terms for Personal Spending Accounts tailored to their workforce. Typical PSA eligibility includes:

Full-Time Employees

Most employers make their PSA available to regular, full-time staff working at least 30+ hours per week. This provides coverage to the core employee group.

Part-Time Employees

Many companies also extend PSA eligibility to part-time employees. Contribution amounts are pro-rated based on hours worked. For example, part-time staff working 20-29 hours may receive 50% of the full-time PSA allowance.

New Hires

Employers can choose whether new employees are immediately eligible upon hiring or subject to a waiting period before accessing the PSA. Immediate eligibility helps attract new hires.

Departing Employees

When employees leave the company, any unused PSA balance can remain available for a set time or be forfeited immediately. The portability of balances helps with retention.

Retirees

Retiring employees are sometimes permitted to retain access to leftover PSA funds for a defined period into retirement. This supports the transition.

Defining PSA eligibility thoughtfully to align with your workforce needs and priorities enables optimal value.

Personal Spending Account Regulations in Canada

While flexible, Personal Spending Accounts in Canada must adhere to specific regulations:

CRA Requirements

To receive tax advantages, PSAs must follow guidelines set out by the Canada Revenue Agency (CRA):

• Funds can only reimburse expenses allowed under the Income Tax Act.
• Accounts must be structured as a private health services plan (PHSP).
• Any unused balance must be forfeited at some point.
• Employer contributions are non-taxable benefits for employees.

Payroll and Tax Administration

Since PSAs provide taxable income, integration with payroll processes is essential:

• PSA reimbursements must be added to T4 income.
• Tax withholding and remittance must be handled appropriately.
• Administration processes need to be auditable.

Plan Documents

A detailed plan text document is recommended to define all rules and avoid compliance issues.

Best Practices for Personal Spending Accounts

Following certain best practices helps employers optimize their PSA program:

Communication and Education

• Provide clear, upfront communication on how the PSA works.
• Give examples of eligible and ineligible expenses.
• Share links to lists of covered expenses.
• Remind employees of usage deadlines approaching year-end.

Streamlined Administration

• Offer accessible submission channels – mobile app, online portal, email, etc.
• Minimize paperwork required for claims.
• Set reimbursement schedule – weekly, bi-weekly, monthly, etc.
• Leverage integration with payroll for tax handling.

Year-End Deadlines

• Set a firm claims submission cutoff date – December 31st is common.
• Allow 30-60 days into the new year for the prior year’s expenses.
• Remind employees of impending deadlines.
• Enforce a “use it or lose it” policy.

Coordinate with Other Benefits

• Position the PSA as a supplement to core insurance plans.
• Require insurance plan processing first before PSA reimbursement.
• If implementing other spending accounts, streamline administration.

Following best practices maximizes the efficiency and value of your PSA program.

Conclusion

A Personal Spending Account (PSA) is a flexible way to improve employee benefits. It supports wellbeing, engagement and retention. A PSA helps employers provide complete work, health, life support, group health benefits, retirement savings, and paid time off.

With a PSA, employees have the freedom to choose from a wide range of options that best suit their needs and situations. This control and flexibility allow them to use the yearly funds as their priorities change, ensuring their benefits are always aligned with their evolving circumstances.

For employers, a key advantage of a PSA is the ability to set a yearly limit, which effectively controls costs and mitigates financial risk. This feature provides a clear budgetary framework, allowing employers to manage their resources more effectively.

A PSA also helps attract talent in a competitive market. Remote work, paid leave, and diversity policies show the employer cares about employee experience and quality of life.

PSAs can be designed in many ways – taxability, funding, eligibility, and allowed expenses. This lets employers create a PSA that fits their workforce. Following rules and best practices keeps things running smoothly.

PSAs are less common than health insurance or paid vacation. But they are becoming an expected part of a good benefits package. Their flexibility meets many current needs, from mental health and money management to personal growth and work-life balance.

As benefits keep changing, the PSA provides an adaptable solution that will likely stay important. The PSA offers clear benefits for employers who want to improve their plans and employees who want more options.

Article Sources

At Ebsource, we help Canadians make smart choices about employee benefits. We provide full, honest information based on insights from experienced financial experts and industry best practices. Our statistics come from trusted government and industry sources like Statistics Canada and the CLHIA, ensuring accuracy.

Our advice is based on thorough, fair research on Canada’s leading employee benefits providers. This lets us make personalized suggestions that fit people’s budgets and needs. We are always objective, transparent, and independent in everything we write. We proudly offer reliable advice using credible sources and following strict editorial standards. As Canada’s most trusted source for employee benefits news, we are committed to helping Canadians make wise benefits decisions.

What is a Personal Spending Account (PSA) and How Does it Work? – bbd.ca
Personal Spending Account – hr.ubc.ca
What is a Personal Spending Account (PSA) and how does it work? – olympiabenefits.com