What is a Private Health Services Plan (PHSP)?
Canada Revenue Agency (CRA) allows business owners whether a Sole Proprietor, Partnership or Corporation to fully tax deduct healthcare, dental and vision expenses in a tax-effective and cost-efficient manner. A PHSP / Health Spending Account is an alternative to traditional health insurance. Used by thousands of small business owners across Canada, an HSA is a special account established to exclusively pay for health care services for you and your family members.
A PHSP enables a small business to deduct 100% of their family health and dental expenses – without paying standard premiums typically associated with traditional health insurance plans.
The ability to write-off health and dental expenses can create savings of more than 30% on medical and dental related expenses. For contractors, consultants, and other incorporated small business owners, this is an effective tool to cut your taxes and reduce your medical costs.
How is a PHSP more cost effective than a extended health & dental insurance plan?
With a Private Health Services Plan (PHSP) the company does not pay a monthly premium and there is no co-insurance. Reimbursement is 100% and is paid by Interac eTransfer the same day AVFS is paid and is non-taxable to the employee.
With a group insurance plan the company must pay a monthly premium whether the plan is used or not and reimbursement is usually 80/20, 50/50 or the expense is not covered at all leaving the employee out of pocket a portion or the entire amount. Also, group insurance is a taxable benefit to the employee.
What is the maximum annual deduction allowed?
For Corporations, there are no annual limits.
Unincorporated individuals and their families, there is an annual limit of $1,500 per adult and $750 per child. For example, two adults and two children would be entitled to a maximum of $4,500 per calendar year.
Does it matter who spends the money from the household maximum? (Unincorporated)
No. Anyone in the family can spend up to the total allowable amount for the entire family.
What’s the cost?
One-time set-up fee ($75.00) which includes taxes. The additional cost is 5% administration fee on all claims submitted plus applicable taxes (only paid on administration fee) depending on which province you live in.
Do I qualify?
You are an excellent candidate for an HSA if you own a business, have medical bills, and pay income tax.
How will an HSA / PHSP in Canada save me money?
An HSA/PHSP will save you money in three ways:
- Tax savings from deducting 100% of your medical costs
- Reducing your costs by avoiding high premiums associated with traditional health insurance
- The elimination of expensive deductibles and co-payments
Below is an example of a savings comparison between a medical expense paid personally vs. through your business. Let’s assume your corporate tax rate is 15% and personal tax rate is 43% and let’s also assume you have a medical expense of $1000.00
Choice 1 – After Tax (personal medical expense paid for out-of-pocket)
After tax dollars is the amount remaining after personal income tax is paid. In this example’s tax bracket, the company will pay $2325.58 (including income tax), of which 43% is used to pay income tax ($1325.58) in order for you to pay this $1000.00 medical bill.
To explain in detail, each $1.00 you spend on medical expenses would require your company to pay you approximately $2.33 before tax. The amount of 43% (or $1.33) is paid in tax to Canada Revenue Agency in the form of provincial and federal taxes.
Choice 2 – Before Tax (medical expense is paid for through your business)
In this case, the medical expense is paid through your corporation as a before tax business expense. Effectively, your business is able to write off 100% of your medical expense. You save money by keeping the additional 43% tax inside your corporation. This means that for that $1000.00 expense, your company only pays $1050.00 to cover the cost instead of $2325.58; leaving $1275.58 in the company. On top of this, you get $1000.00 in your pocket tax free AND your company gets a tax deduction of 15% ($157.50) so the total savings is now $1433.08.
The cost of the Health Spending Account (HSA) will vary by provider. In this example, admin fee is 5% ($50.00 in this example). You would pay $50.00 instead of $1325.58 in taxes.
Is an HSA/PHSP effective for an owner/operator/one person business?
This category of business includes incorporated consultants, contractors, and professional corporations. This segment of Canada’s business community is overlooked by traditional health insurance carriers as it is difficult and expensive to insure.
Interestingly, a PHSP can be most effective for a one person business. By using a PHSP, you and your family would benefit from a 100% tax deduction for your family medical benefits.
Here are some of the advantages a PHSP provides for an owner/operator/one person business:
- Deduct 100% of your family’s medical expenses
- Reduce your personal and corporate taxes
- Get extensive medical coverage for your expenses (more than traditional insurance)
- There are no premiums – no monthly, yearly, or ongoing
- Complement your spousal insurance
What types of health and dental expenses are covered under a Health Spending Account?
One of the great benefits of an HSA is the freedom it provides through the extensive range of eligible expenses. Forget about restrictions. You’ll love being able to claim 100% of your child’s dental braces. These types of expenses, along with a thorough list of qualified medical practitioners, procedures, and medical devices help make a Private Health Services Plan an attractive choice for the small business owner.
Unlike many traditional insurance plans, an HSA offers 100% coverage on a wide range of expenses…even the expensive ones. Does your son need physiotherapy? Does your spouse need a new pair of glasses? Or maybe laser eye surgery? Maybe you want to get an MRI? Rest assured, all of these are eligible expenses with a Health Spending Account.
You can even claim your spouse’s premiums if they are a member of a traditional insurance plan. Premiums contributed to a non-government insurance plan are an eligible expense with a Health Spending Account.
Do you have unpaid portions that are not covered from your spouse’s plan? Not a problem – the remaining amount of an expense is eligible with a Health Spending Account. Fantastic.
Prescription drugs, massage therapy, and hearing aids are all eligible expenses too. If you are traveling to the sun on your upcoming vacation…pick up a pair of prescriptions sunglasses so you can read on the beach (the sunglasses are eligible). Sore feet from that long hike or fishing trip? Pay a visit to your friendly Podiatrist as all of their services are eligible expenses.
Are my dependants covered?
CRA doesn’t define dependents in the same sense when dealing with a PHSP / HSA. CRA uses the term Members of Household. As long as they are related to you by blood, marriage (including common-law and civil unions), or adoption AND living under the same roof / address, then they are covered.
How does a PHSP compare to traditional health insurance?
here are several advantage of a PHSP compared to a traditional health insurance plan. Premiums, expense eligibility, coverage, ease of use, deductibles, and claims are some of the areas a PHSP is considered more favorable. Understanding the difference between insurance and administration is critical when deciding on how to pay for your medical expenses.
Here’s 5 reasons a PHSP / HSA is better than a traditional health insurance plan:
|Traditional Benefits||PHSP / HSA|
|• Monthly Premiums regardless of usage|
• Premium increase at renewal of plans
• Age plays a factor in premium prices
|• No premiums due to usage or age|
• Fixed percentage so you know your cost
• Only pay for what you use
|Eligible Expenses |
|• Restricted medical expenses|
• Limited by annual or life-time maximum
• Medical history may be requested and pre-existing conditions may be excluded from coverage
|• No restrictions on the type of expense, but by dollar (if set)|
• Wider range of eligible expenses
• No limit based on pre-existing conditions
|Complexity||Given a plan outline which is geared towards a long list of what is not covered and how much you will pay as a deductible for each expense type. Figuring out your coverage and if it will be reimbursed partially or in full can get complicated and stressful.||100% coverage on anything deemed an eligible medical expense by CRA(anything that is not deemed cosmetic)|
|Deductibles||• Benefits restricted with deductibles based on family/single|
• Benefits can be restricted by a co-insurance of 50%-80%
• Limit on number of treatments or sessions and visits
|• No deductible|
• No co-pay amount
• No restrictions on visits or treatments
|Claims||• Long processing time|
• Slow reimbursement
|• 24 business hour processing time|
Do I qualify for an HSA even though I have a pre-existing condition?
Yes, you qualify. Pre-existing conditions do not affect your eligibility for an HSA.
How does an HSA claim work?
- Pay for your medical expense (let’s say with your personal credit card). (Pay provider $1,000)
- Make an online claim (enter your expense details, submit the claim, we will invoice your company for $1000.00 + admin fee + GST). (Pay AVFS $1,050.00 – GST is dependent on province – from your corporation)
- AVFS reimburses you via Interac eTransfer for the original expense ($1,000)
The payment from your corporation to the administrator is 100% tax deductible. The reimbursement you receive from the administrator is 100% tax free. We have created this helpful guide which you can find here on how to submit a claim.
Is there a limit to how much I can deduct?
There are several factors that determine the limits within an HSA/PHSP. A reasonable maximum benefit level for an incorporated business owner is $15,000 per year. AVFS believes that a reasonable amount would be considered 20% of your annual taxable wage/salary. If the business has additional employees, the business owner is able to determine specific amounts for each classification of employee (management, full time, etc).
Can I set up and administer an HSA myself?
In theory, you can self administer an HSA for your business. You can also do your own accounting, legal work, and website development. The fact of the matter is that time is your most valuable asset and you would need to determine if you have the expertise and resources at hand to properly establish, organize, and maintain your own plan. Are you going to be able to dedicate scarce resources to the administration of your HSA?
Strict guidelines and conditions are required to qualify an HSA and ongoing knowledge is required to properly adjudicate claims. In exchange for a small fee to a provider, you can be worry free that your HSA qualifies with CRA and focus your time on your business and more important matters.
Moreover, what happens if you are audited and there is a problem with your plan? Having a third party administrator gives you an added layer of protection and signals your HSA is in the hands of an expert that is well equipped in the specifics and intricacy of this financial product.
What can I give my accountant?
Although straightforward to use, an HSA does require proper explanation and understanding before it is adopted by any particular small business. An HSA directly involves matters of taxation and ultimately some small business owners speak with their accountant for clarification. You can forward our website and contact info to your accountant. We would be happy to explain to them the benefits and concepts of a PHSP and how to claim them on taxes. AVFS provides you with a summary tax receipt that you give to your accountant at the end of your fiscal year.
Is a PHSP / HSA legal?
Yes! They are legal in Canada – as long as the guidelines are properly adhered to. To properly satisfy the conditions set forth by CRA, make sure you choose a reputable provider and understand what you are purchasing.
When will my HSA become effective?
Effective dates for HSAs are an important component for CRA eligibility. A PHSP with AVFS, allows you to go back to the start of your current fiscal year. While some plans allow you to go back further, we recommend staying within the fiscal year because the further back you go, the more CRA may question why those medical expenses weren’t claimed on personal taxes. If your fiscal year is less than 30 days from the time you register, you can go back to the beginning of the last fiscal year. For example, if your year end is December 31 and you are signing up in January, you can theoretically go back to January 1 of the prior year.
How long have PHSPs and HSAs been available to Canadian businesses?
CRA legislated a version of the PHSPs into existence in the late 1970’s as a tool for small business owners to decrease tax to spur economic growth. In the early years, it was only open to Incorporated companies but in the 1980’s, CRA opened it up to include Sole Proprietors. Over at AVFS, we have 9+ years of experience in PHSPs and know the Income Tax Act with regards to medical expenses and PHSPs intimately.
Why are there so many different versions of a PHSP/HSA out there?
Boiled down, a PSHP/HSA is a contract. It is a contract between an employer (a business) and an employee. The conditions of the contract should outline the relationship between the employer, employee, and the administrator. So in that sense, all Health Spending Accounts (HSAs) are the same but some companies operate them differently.
However, there are some key conditions that will affect these plans. Are there arm’s length employees? What type of compensation does the owner receive (dividends)? Are the employees part time? As a plan with tax planning components, an HSA adapts to the company structure.
Why don’t more people know about these?
Large providers of traditional health and dental insurance in Canada are very adept at marketing. In fact, they are so effective at developing and delivering targeted messaging that many small Canadian business owners firmly believe that purchasing traditional insurance is a must to effectively protect themselves and their families. The truth is that there are viable alternatives to insurance.
A Health Spending Account is a tax plan in the nature of insurance. It feels like insurance since it deals with medical costs but it is not insurance. The critical difference however, is that by paying for medical expenses through a PHSP, you are self-insuring. There are significant advantages to paying for medical expenses through a tax plan instead of an insurance plan.