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September 14, 2018

Private Health Spending Plans for the Owner/Operator Business

Individuals who have incorporated their business such as consultants, contractors and professionals often find that providing affordable health and dental care coverage for themselves and their families can be an expensive proposition.

Take Bob for example.  Bob had just left his architectural firm to set up on his own.  In looking at the options available for him to replace his previous firm’s Extended Health and Dental coverage for he and his family, he discovered that the monthly premium would be between $400 and $500 per month.  This was for a plan that didn’t provide coverage for all practitioners and procedures, had an annual limit on the benefits, and a co-insurance factor of 20% (only 80% of eligible costs were covered).  There wasn’t even any orthodontia coverage although he could purchase that in limited amounts at an additional cost!  He also had to move quickly to replace his lost coverage as he had a pre-existing condition that most likely would not be covered if he waited too long to implement the new plan.

It seemed to Bob that there was a possibility of not receiving full value for his extended health and dental premiums.  It was possible that he would spend far less than the $6,000 of premiums he would pay over the course of the year.  The monthly premiums were also not tax-deductible.  Fortunately, Bob found out about the Health Spending Account (HSA).

What is a Health Spending Account?

An HSA is becoming a popular alternative to traditional health insurance.  An HSA is defined by the Canada Revenue Agency as a Private Health Spending Plan.  Under the terms of a PHSP, eligible small business owners can;

  • pay for their family’s medical expenses
  • deduct the cost from the business income
  • not have the benefit taxable to the business owner/employee

This article focuses on HSA as it applies to a one-person owner of a small business corporation.  As you might expect, there are guidelines that must be met and restrictions that will apply.

  • These plans cannot be for shareholders only. The shareholder must be a valid employee and receive a portion of his or her remuneration in the form of salary.
  • The CRA prefers that the corporation employ the services of a third party to manage the plan and adjudicate the claims.

It is in the business owner’s best interests to use the services of a Third-Party Administrator (TPA) who specializes in PHSP’s to ensure that all the requirements are met, and all claims and payments are valid.

What does an HSA cost?

The cost of the Third-Party Administrator is very reasonable.  There is usually an initial set up charge of a few hundred dollars and on-going fees run 5% to 15% of the claimed amount (plus taxes), with the typical fee being approximately 10%.

Some firms also charge an annual fee, so it is best to shop around or ask your financial advisor for advice.  Being able to submit claims online and receive reimbursement by EFT almost immediately is a benefit that many of the third-party administrator’s offer.

How does it work?

Bob’s first experience with his HSA illustrates how the plan works. The HSA that Bob had implemented is referred to as a Cost-Plus plan which is the most popular arrangement with one-person corporations.

Let’s Break it Down

  • Bob’s daughter started orthodontic treatments and his first charge was $1,000.
  • Bob paid this amount by credit card (yes, he got points for that).
  • Bob then forwarded the receipt for his payment directly to the TPA who would reimburse Bob his full $1,000.
  • The TPA then bills Bob’s company for the amount of the treatment plus their 10% charge.
  • Bob’s company pays the invoice and gets to deduct the $1,100 from corporate taxable income.
  • The payment Bob’s company made is not taxable to Bob.

A good result! Bob has his expense reimbursed tax-free while his company gets to deduct the amount of the payment plus the administrative cost.

What are the advantages of an HSA?

  • All medical procedures, necessary equipment and certified practitioners as listed by the CRA are covered in full.
  • There are no medical questions for starting a plan and no pre-existing conditions clause to satisfy.
  • All dependents may be covered.
  • Deductible portions or shortfalls in other plans can be claimed.
  • Benefits are not taxable while the costs to the corporation are tax-deductible.

As with any government regulated plan, make sure you employ the services of those who are experienced in advising on PHSP’s.  They will not only guide you as to the best way to set up your plan, they will keep you out of trouble once you do.

As always, please feel free to share this with anyone you think may find it of interest.