Private Health Services Plan (PHSP) for Canadian Businesses (Part I)
*This is Part I of a two part series.
What is a Private Health Services Plan (PHSP)? Over the next two weeks, Olympia Benefits will author a definitive two part retrospective addressing the PHSP. Today, part one addresses the meaning and common names for a PHSP, understanding the facts and proper administration of a PHSP. Next week, part two will ask the age old question: to insure or not to insure?
Since the late 1990s the PHSP has gradually gained acceptance as an alternative way to reward employees with cost effective health care. Approximately 30 % of employers are now using some form of a PHSP. With this acceptance, there has also been a proliferation of PHSP administrators to a point where it is difficult to determine their quality and veracity.
The meaning of a PHSP is described in two Interpretation Bulletins. One was prepared for 1988 and subsequent taxation years and another for taxation years between 1983 and 1988.
Please note the reference to TAXATION YEARS – I certainly understand that the word TAX may prompt you to exit this post – but a thorough retrospective of a PHSP must pay homage to the tax department (CRA). Also, as the CRA has an extensive reach, and lacks anything resembling a sense of humor, it is probably a good idea to respect the guidelines they offer – even if hard to understand sometimes.
The legislation is fairly straight forward. In its simplest form, it permits an employer to reimburse an employee for the cost of most health care expenses. The reimbursement is tax free to the employee and a business expense for the employer. What a deal!
Unfortunately, the PHSP is often misused and misunderstood. In fact, one could say all tax free medical benefit plans are PHSPs. They come in all shapes and sizes. For example, a traditional insurance plan like Blue Cross is a PHSP. A Health Spending Account (HSA) is a PHSP. A Health and Welfare Trust, now more correctly referred to as an Employee Life and Health Trust, however, IS NOT a PHSP, but interestingly may contain a PHSP within its definition. The Olympia Benefits Health and Dental Plan is a PHSP.
Some minimum, absolute necessities to ensure a PHSP is operated properly and will pass scrutiny with CRA are, in no particular order of importance:
- There must be an employer/employee relationship
- There must be a contract between the employer and the employee
- There must be a contract between the employer and the Administrator of the PHSP
- The plan must be in the nature of insurance – meaning a PHSP must involve a reasonable degree of risk. It follows that backdating a PHSP is not acceptable
- The plan must include an annual spending amount, which cannot normally be changed.
- The plan allows reimbursement for specific health care needs as specified by the employer or all medical expenses allowed by CRA
- Business owners are eligible if they also act as an employee, even if there are no other employees in the business. A caveat here is that, if there are other employees they must be included in the plan.
- When choosing a PHSP administrator, be very concerned with their abilities, plan design, and execution.