Health Spending Accounts: Hero of Small Business Benefits?
Husband and wife team Jane and John Smith own a profitable consulting business that they incorporated five years ago. While they, along with two other employees, take a salary out of the company, they do not have any other individual health benefits that many larger consulting firms offer employees. With traditional individual health benefits not being a cost-effective option, how will Jane and John offer health benefits to proactively cover their staff and their health?
The Health Spending Account Hero!
The simple truth is that your business won’t do you any good if your health is not properly protected. The struggle for a number of small businesses like Jane and John’s is that “health benefits” can often become a hefty cost, often creating a hindrance to the business’ overall financial health and performance.
Private Health Service Plans (PHSP), often referred to as a Health Spending Account (HSA) offer a cost-effective solution for providing health benefits to the sole proprietor, small business owner, and /or their employees. HSAs are specifically listed in the Tax Act to say that they are a different type of coverage than traditional health benefits, offering more options for health benefits’ coverage. Revenue Canada must also allow companies to deduct these premiums in their corporate tax return.
The Health Spending Account Process
The process itself for reimbursing an employee is different. Imagine that Jane and John registered their company for a PHSP. Shortly after, Jane had a root canal. To reimburse her, the process she followed was:
- Jane went to the dentist and directly paid for the $1000 of work done
- She submitted her receipt to her and John’s business
- The business sent the claim to their PHSP carrier
- The business also paid the carrier the same $1000
- PHSP carrier then reimbursed Jane the $1000 directly for the costs of her dental visit
- The business now has a $1000 EXPENSE, which is 100% deductible, less the PHSP provider administration fee.
This demonstrates how the employee is reimbursed, while the company earns a deductible expense for their employees’ health costs, later resulting in a tax benefit.
Calculating PHSP Costs
The question that may still be looming is how do the PHSP providers make their money then? After all, with traditional benefits providers, the company and/or the company’s employees often pay a fee each month to ensure they are covered.
If the business is submitting a $1000, and the PHSP provider reimburses $1000, how do PHSP providers survive?
With this type of health plan, there are no monthly fees. Rather, the fee is only charged when there is a claim made. We have seen HSA coverage ranges from 5 – 10 percent but we also have a client where they paid an annual fixed fee. Each PHSP provider has their own twists and variable as to how they charge. So, this is a conversation best left for the individual provider and you, the business owner, in understanding your company’s needs.
What should be noted is that the CRA will only recognize eligible expenses, so those new runners and exercise pants cannot be written off just because they support your “running habit.”
While a health spending account may not be the perfect solution for every situation, it can be a beneficial option for you and your company. The best place to start is to:
- Talk to your accountant or bookkeeper to see what numbers are available to you. Questions to consider: what is your salary, what is a reasonable percentage of coverage, is there more business planning we can do, etc.?
- Speak to a PHSP provider, and begin comparing the different HSAs available to you, and
- Ask your employees if this is something of benefit for them.
With any small business owner, the human resources side can be a struggle when compared to larger companies where there may be more benefits – either monetary or health coverage. HSAs are a way to level the playing field in a more cost-effective manner when compared to other mainstream health coverages.
If you’re not sure what numbers your business has available to you, but you know you require some form of health benefits, contact Priority Business Solutions. We’ll help you understand where to start!
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